"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Friday, October 24, 2014

Has the Bean Market Rally Finally Halted?

Beans have rallied an astonishing $0.98 since the first of this month. Why I say, 'astonishing' is because we are in the midst of harvesting a massive bean crop with the possibility of having a carryover nearly 4X as large as what we were left with for the 2013-2014 marketing year.

Part of what has contributed to this very unexpected ( because of the sheer size of the rally ) move higher has been that extremely tight carryover of which I just wrote. With the beans ( and the corn ) lagging the normal maturity levels somewhat, harvest has been running a bit behind the normal pace. ( Remember - I submit that the reason for the lag in maturity has been the near ideal finishing conditions for the plants, warmth and moisture, which has kept the plant pumping nutrients into the ears/pods instead of beginning the normal shutdown process. Translation - bigger yields!).

The slower pace of harvest means that some end users have been scrambling for supplies while they waited for the new crop to hit the pipeline. So we are faced with the anomaly of soaring bean prices over the last three weeks during a time frame in which we normally see prices working into a harvest low.

What has led this move higher has been the meal. For those who are new to grains, meal is made from crushing beans. The other by-product is soy oil.

There have been some reports coming out of the Eastern belt that processors are having trouble getting enough beans to crush. I do not know how reliable those reports are but let's just say that apparently the meal market believes it.

Look at this chart and you will see what I mean. Meal has rallied $65/ton since October 1! it is this strength which has driven the beans themselves higher. This is the normal for bean rallies - they are always led by meal.

However, this market may very well have run out of upside steam this week. It is still too premature to call an end to this rally but there are some signs that need to be heeded.

Look at where the rally has run. It stalled out just above the 50% Fibonacci retracement level which is near $353 before it closed BELOW that level today ( Friday). The market did however manage t to close over the 100 day moving average which is a big deal technically; however, the key for that next week will be whether or not it can sustain any upside follow through and remain ABOVE that 100 DMA. If not, there is a good chance that the meal has topped and with it, the beans.

By the way, every now and then we get the occasional "self proclaimed trading genius" who scoffs at those of us who employ Fibonacci numbers in our trading strategy. What I can say to them is that in all the years I have been trading, I find myself constantly amazed at how close these various levels are to reversal points that markets make. They are not fool-proof ( no trading method is ) but they are reliable enough that any professional trader ignores them at his or her own peril.

So has the bean market rally finally halted? We shall certainly see next week.

One other thing - the Cattle on Feed report confirms the tight supply of cattle that livestock traders are well acquainted with by now but it did show a bit larger number placed than at the same time last year. Still, the comp was already tight. That being said, while the cattle chart is one of the few charts in the entire commodity complex that has been very strong, the December is having trouble cracking the ceiling at $170. For long time cattle traders, some of us remember during the bust years seeing cattle prices at a THIRD of that. I am talking about a "5" handle in front of the cash cattle prices! That is to provide some perspective just how high these nose-bleed prices are in the cattle industry.

I am still keeping a close eye on this market for signs of a permanent top. I still think that cattle are living on borrowed time, giving the overall trend towards lower prices in the commodity sector, not to mention the increased competition from cheaper pork and chicken. The one thing that has kept beef elevated in my opinion, longer than I originally expected, has been the sharp - and I do mean SHARP, fall in gasoline prices. Cheaper gas leaves mom more money to buy high-priced beef but even cash-flushed moms have their limit.

So far, while this market has bent, it has yet to break. Big specs keep coming in and defending their long positions and have had the wind at their back as packers keep paying up for cattle to fill their slaughter schedules.

Lastly, hedge funds have been huge buyers in the corn of late and that is partly responsible for the $0.45 rally in corn since October 1. Based on today's COT report, hedge funds have covered, or bought back, 60,000 short positions since the start of the month. Yes, you read that correctly. We have seen a MASSIVE Short covering rally in the corn. I am also watching that market to see if it is running out of steam to the upside as well.

With wheat putting in an Downside Reversal Pattern today, it could be that the corn is ready to move lower into a final harvest low. Still, with all that has transpired in the grains these last couple of weeks, I am certainly treading lightly!

Here is the wheat chart. An interesting thing about the price action. I have noted that on the way up, $5.20 was a tough nut to crack but if cracked, wheat could run to $5.40. Guess what, it ran through $5.20 and managed to close above that level yesterday for the first time, then promptly ran to $5.39 1/4 before COLLAPSING BACK DOWN through both levels today! WOW...

With all the goofy money flows this week and huge spread positions being piled on and taken off, I am a bit leery about prognosticating anything about the grains with much certainty right now but this is usually one of the more reliable technical signals. Then again, Wednesday's sell signal in the beans and in the meal immediately was negated on Thursday so there ya go! The motto is: "NOTHING IS EVER SURE IN COMMODITIES - NOTHING!". Just about the time you think you've got things all figured out, a steamroller flattens you and leaves you wondering what the hell just happened to you!
Enjoy the weekend - the drill starts over again Sunday evening!


  1. Thanks Dan, very interesting and informative article.
    I never really gave any thought to how crops finish out vs. yield and the effect on delivery etc.

    Your comments on cattle and what looks like a peak on that chart seems based in logic.
    I'd love to see some lower sticker prices soon on my favorite porterhouse steaks. Love 'em!

  2. thank you from me also Dan. you don't have to do all this work for free. your integrity is on full display here. i will kick in when i can.

  3. Dan- thanks for the follow up posts. Like the motto...Add me to the "had it figured out but got steamrolled" category this week!

    Seems the rally in corn this month has been pressuring and keeping a lid on feeder cattle prices. The spread between feeders and live cattle has dropped about $5 over the last week. It looks like feeder prices peaked at the beginning of Oct back when corn was at a low. So it will be interesting to see what happens with feeder prices if corn starts selling off again. Do you suppose a drop in corn prices could continue to support feeder prices for the time being? Thanks

  4. Down is the New Up!

    confused by all the downward action in Silver? Can't understand why COMEX Open Interest is so high, and SLV is stacked to the gills with Silver inventory? Never fear - the answer is at hand! STEALTH BUYING!


    (so stealthy, it is entirely undetectable by any metric or measure known to man - least of all, Price)

    1. @Ophelia - a little off subject--per your post yesterday-the 20 day correlation coefficient of the HUI to Gold typically runs from .75 to 1 over the past 5 years, rarely dipping below .5…the latest however is -.23! The divergence doesn't seem to be a signal for the next movement of the miners (though as Trader Dan suggested, it does imply that gold is overvalued).

      The HUI's correlation to GDP has been going down since 2012. 20 day correlation coefficient from .85 in early 2012 to -.53 today.

      Also to your point the other day--it's pretty easy to figure out which miners won't go under. A lot of the big miners are in good financial shape-all in costs @ or under $1,200, lower debt, and better relationships with the countries in which they mine. I think the risk is more of dead money at this point than bankruptcy.

  5. For TD or anyone...

    If I was interested in looking at almonds (or tree nuts in general) where would I find a chart or info on them and what investment vehicles (besides futures) might I be able to trade them to the long side?

    The whole California drought situation has me thinking about possible long term reprecussions in that sector and I'd like to look into it further.
    I recall reading somewhere how California is responsible for the vast majority of certain tree nuts in the US and possibly even globally.
    Not sure about the global part of it.

    Thanks for any help.


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