WINTER BLAHS!
Prepared by Richard A. Brock & Associates, Inc.
(November 17, 2000) After just completing the first week of the winter "seminar trail,"I have drawn one conclusion--almost everyone is confused on the current grain market. This week was interesting in that I spent one day speaking to ingredient buyers, one day to producers and one day to ag lenders. Three entirely different perspectives on what is going on in the world as well as what's going on in the grain market.
Going into this week, we were very concerned about the grain markets ourselves, as you could tell from the previous week's Brock Report. But this past week just reminded me how difficult all bull markets are, and while this may not be a major one, the trend is up in corn at least. Here are some of our observations from the past week:
1. A large number of feed buyers are not covered in this market much past the first of the year. Few people have believed either corn or soybean meal could go higher and consequently have purchased in advance only limited quantities.
2. The majority of farmers have collected their LDPs for corn and beans, and for good reason are concerned about prices going lower. No one wants to start giving back values under net loan rate price.
3. Bankers are also concerned about prices slipping lower and are making sure all their clients can cash flow this year.
The Bottom Line: Everyone seems extremely anxious to sell corn and soybeans right now. The news is mostly negative, but is also well known. This reminds us of many other markets during a bottoming process where the news is negative and the majority of people are comparing current prices to the bottom of the market, thinking these are good prices. While we are not raging bulls, attitudes in general would seem to suggest that corn and soybean prices are still heading higher.
Seasonals Are Favorable
The charts are very revealing. Since 1960, the highs for cash corn prices have never occurred in the months of November, December or April. The highs have occurred once in January and once in February. The highs have occurred twice in the month of October and twice in March. As is quite visible in the chart, the majority of highs either occur early or occur late. What this tells us is that highs in a corn market are the result of weather problems; not long term demand issues.
Corn Seasonality--Percent Highs
1960/61-1999/00
Central Illinois Cash Prices
The lows in the corn market are similar. They either occur early in the season or late in the season. If a market hasn't bottomed by November, odds are that the lows will occur in July or August. This clearly shows that if prices are "high" early in the season, storing and speculating on grain is not going to pay very big dividends.
Corn Seasonality--Percent Lows
1960/61-1999/00
Central Illinois Cash Prices
Thus far, the lows of the cash corn market in Central Illinois occurred on September 19th at approximately $1.51. The market is now trading close to $2.00. A seasonal low in September would fit ideally in long-term price patterns where last year's low occurred in the last month of the marketing season--August. Lows normally occur back to back, as do highs.
So what does that tell us at this point? No one knows what the reasons are, but history would indicate the odds of the corn market making a high before at least January are low. Historically, at least, the seasonal high should occur somewhere between January and the end of March. With carryover supplies now under 1.7 billion bushels, the ultimate high in corn prices will be determined by both planted acreage and weather this spring. As difficult as it is to sit on corn right now, historical odds point strongly to the strategy of "sit and wait."
Technicals Are Strong
The past month has been very difficult. After a sharp price rise of two or three days, prices have been grinding lower for two weeks in very small increments. That also occurred again over the last two weeks, until Thursday when March corn futures established an outside day up. Thursday's low now becomes crucial support for this market. It should be the sign that the near-term drop in corn prices has been completed.
Two weeks ago, prices established a weekly reversal up and the major trend line there looks very solid. Based on the weekly corn chart, the next stopping point on nearby corn futures should be the resistance area at $2.50. Assuming that occurs after December corn futures expire, it would be a very logical stopping point for March corn, particularly since there is a gap left at $2.45 from June 12th . The bottom line: we are not ready to give up on the bull case for corn just yet.
Soybeans Are Lagging
No question the soybean market has been the bear of bears to deal with in the last six weeks. But in reality, this market has gone nowhere since about the beginning of October and prices are still in a sideways trading range. We have obviously been crushing soybeans for very strong soybean meal demand and letting the oil supplies pile up. Soybean meal is going to continue to be the key price indicator in this market. If you look at a December soybean meal chart, you'll note that prices have been in a base-building phase since early September. A close above $175.00 per ton will set a stage for a very quick move to $195.00 per ton. We feel the odds of that occurring are reasonably high.
Putting It All Together
Bear markets are always easier to make decisions in than sideways or bull markets. Right now we are in a market that is very slow to move and the news is almost all negative, which is why prices are where they are. It takes much more patience in a market like this than what we have experienced since 1995. All we can say for certain is don't panic yet. The trend is your friend, and it is up.
November 17, 2000 Richard A. Brock & Associates, Inc. 2050 West Good Hope Road, Milwaukee, Wisconsin 414-351-5500