Last week it was the 100 day moving average in the meal that was the talk of the town. Today, and this week, it is the 200 day moving average. Meal has now taken both of them out and has set in motion a blast of buying by hedge funds in spite of the fundamentals associated with improving harvest progress and soon to be hedge pressure.
Farmers watching the rally are sitting tight on sales of new crop ( (which is a mistake in my opinion ) as most of them now want to see how high the rally in the beans and in the corn will go before they let go of their newly harvested crop.
The problem with such thinking is that it essentially turns the farmer into a speculator. Rallies that fly in the face of fundamentals are bewildering but they can flame out faster than they began leaving a lot of people holding the bag at the highs wondering what they did wrong.
My suggestion to farmers who think higher prices are yet to come is to not hold off on selling any new crop but to sell a portion of it and replace that with call options if you think you can fetch more down the road. What you do not want to do is to end up selling at the same time all of the hedge funds do as well!
Once processors have new crop supplies of beans flowing into the pipeline, especially in the Eastern Belt, basis is going to move swiftly lower in my view. The buying frenzy that has been seen in the meal will then become a selling frenzy. Again, I have no idea when that will occur nor from what level it will take place but I am watching several key technical levels to get a sense of when the hedge funds will have awakened the big commercial hedge pressure machine.
For now, it is the funds in the driver's seat.
Meal stalled out last week at EXACTLY the 50% Fibonacci retracement level of the collapse from the May high near $412. It flew through that level this morning and is now threatening the 61.8% level near $368. Quite frankly, I am going to be stunned if it can succeed in clearing that level although with the Dollar showing some weakness today and the macro boys buying into commodities as a result, anything is possible. If it does, we could see this thing run all the way to $380 before reality sets in.
Meal had traded in a range between $360 and $340 for nearly two months ( July-Sep) before it broke down in the face of the massive bean crop expected. That it has not only returned to this former "value zone" but has exceeded it, is something that I never expected to see and I have seen a lot of weird things in the bean market over the years.
There is some chatter occurring that late rains in Brazil have turned some farmers there away from beans and towards cotton but one has to be careful with such unconfirmed rumors. More often than not, these sorts of stories arise when people are trying to come up with some sort of fundamental reason to explain inexplicable technical price action.
The technical price action has many analysts now confidently predicting a harvest bottom has been forged and that the grains are going to work higher from here. Put me in the disbeliever camp but until I see some signs that these funds are through playing "chase prices higher and move more demand to S. America" I am very careful. Those computers are unacquainted with "value" and will press in the direction that they are programmed to go until something halts them and makes them reverse.
This afternoon we'll get an update from USDA on the harvest progress.
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