COMMODITY FUTURES FORECAST WEEKLY REPORT
Prepared by Philip Gotthelf
Grains Violate Support
(May 18, 2000) A swath of rain is sweeping across the central and northern Plains as well as the Southeast. The obvious result has been a dramatic spike lower in wheat, corn, and soybeans. With the National Oceanographic and Atmospheric Administration's call for La Nina's end, traders are abandoning the drought premium accumulated over the past several months. While subsoil moisture remains tenuous, a steady rain pattern over the next month could alleviate this threat. Can grains challenge 1999 lows?
This year's market can become increasingly complex. In addition to weather swings, the U.S. is considering "most favored nations" trading status with China. A powerful post-NAFTA domestic economy has debunked arguments that global trade will hurt U.S. labor. If anything, foreign demand for U.S. goods and services has put a squeeze on our labor market. Hence, we see the lowest unemployment figure in several decades. So, trading with the largest single population on earth shouldn't carry significant adversity for America's workers.
In particular, American farmers stand to benefit from broadened trade. While China is pushing toward highly mechanized farming, sheer market size for their population and adjacent regions projects to larger U.S. export potential. This is the relief U.S. producers need to balance our own major efficiency strides. Simply put, we could have high prices and record-breaking production...without price supports. Sound too good to be true?
Regardless of which side of the fence you may favor, long-term arguments surrounding China's trade status will only impact immediate trading if an agreement is reached. Otherwise, it's business as usual. This means grains will rally into dryness and correct with every rainstorm. Are there strategies that can work?
Essentially, we must divide knowledge into two distinct and obvious categories; what we know and what we do not know. We do know the potential size of U.S. and Canadian crops based upon planting. We do know that most of the central plains got a very early jump in corn and soybeans. We know the northern Plains are about 60% planted which is early to normal. However, this week's rain has delayed northern progress. Combining early planting with current weather, a bearish scenario emerges with a likelihood for a $5.20 test in July soybeans and a $2.28 dip in corn. Continuing rains could easily bust these supports.
We know there is a subsoil moisture deficiency dominating the entire grain belt exclusive of certain south central regions. We know the major vulnerability in corn will come earlier in July. We know the same holds true for soybeans in early August. So, our knowledge base suggests a balance between negatives and positives.
We don't know how summer weather will impact crops. We don't know the final status of our trade agreements. These two unknowns correlate with the existing subsoil moisture problem and the currently marginal demand for U.S. crops. Both represent major bullish factors that can dominate trading through the harvest.
Dollar Parity Also A Factor
For some, U.S. Dollar parity is less in the forefront. Yet, this becomes a dominating consideration for foreign buyers. Although U.S. grain appears relatively cheap, the soaring dollar makes it far more expensive on a parity basis. Consider that U.S. goods climbed more than 20% since the Euro's slide. Add this to $5.60 soybeans and the price becomes $6.66. In comparison to alternatives, U.S. soybeans are high. This is true for meal and oil, too.
The 1/2-point interest rate hike gave another boost to the dollar rocket. The Dollar Index touched a stratospheric 11250 before backing off a tad with the Euro dipping well below 9000. There are few signs that anyone intends to intervene against the Greenback. So far, it has not appreciably hurt exports nor has it impacted inflation.
New logic is emerging that suggests the old correlation between expensive imports and inflation is not as significant as the slowing effect of tighter money. The Fed was slowly applying the brakes, yet the economy continued roaring forward. This time, Greenspan gave advanced warnings that the rate hike would be more dramatic. The market skipped a few beats, but remained generally on track. Bonds rallied into the news and took a full day before traders asked the question, "Shouldn't a rate hike negatively influence principle values?" With that, prices eased to reflect rising interest rates. At the same time, stocks popped up to hint that there was no "flight to quality"...yet.
Technically Speaking
Some chart watchers scream that bonds are forming a "continuation flag." The pole from 9600 to 9300 is three full points. This projects to a test as low as 9000 in June. Having failed to break out above 9500, the "flag" remained in tact. Still, the chart needs a bust below 9300 to provide real confidence of a further slide. Interestingly, this is the territory many feel is fundamentally reflective of the Fed's latest adjustment.
Bulls maintain that the worst is over. This was the last in the Fed's long string of gradual rate hikes. From here, financial markets should find equilibrium and we should not see further Fed intervention...at least, not for a while.
Perhaps the Fed is satisfied for now. But, the 1/2-point rate increase hasn't trickled down into final moves in interest rates, equities, and the general economy. From housing to lumber, copper, and other materials, the Fed is hoping for a price stall and reversal. This is Greenspan's. What are the limits to Fed economic tuning? Just how accurate is the regulating process? For us, where's the profit potential?
May 18, 2000 Philip Gotthelf Commodity Futures Forecast 7000 Boulevard East, Guttenberg, New Jersey 201-868-2600
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