Beans In The Teens?

As soybeans tested above $9 for the first time this season, fanatic bulls cried their familiar slogan, "beans in the teens!" Current tight supplies coupled with prospects for unusual 1997 weather has grains on edge...particularly soybeans. Last year, I pointed out that beans would be the stronger sister because of planting ratios. Based upon average yields and prices, farmers favored corn over beans and the results are obvious. This year, the ratio has narrowed.

September beans are trading at approximately 7.62 with corn at 2.69. This suggests that the difference in gross revenue per acre is $50 to $70. If we examine input costs, soybeans provide a more favorable potential. Thus, last year favored corn while this year encourages soybeans. Depending upon the spring season, we could see more double cropping to improve all feed grain inventories. This is one reason why the September/August bear spread did not work as a reversal of the July/November. Having made from 32 cents to $1.74 in the bull spread, the bear stance seemed plausible.

Unfortunately, the market does not always see my logic this early in the year. Admittedly, the bear spread works best closer to August.

Generally, spring planting intentions and field preparation have a depressing effect. This year's floods and unseasonable weather have turned traders cautious. Obviously, planting season sets up the rest of the growing season. Poor spring conditions present a "bad- to-worse" scenario where even the best weather over the summer still yields a bad outcome. A drought or other catastrophe takes the bull market to a higher level.

Technically, soybeans and corn appeared overbought. This is why I ventured into short positions. So far, corn has followed our predicted path. Since our price ratio analysis is prospective, I can't fault grains for recent behavior. It seemed as though July soybeans was forming a double top just under $9 with a downside potential just above $8.30. This would be a critical technical test because a dip below $8.20 would confirm a bust through consolidation support. In turn, we would have a possible challenge below $8.

Unless we experience picture perfect weather through June, I doubt we will see any significant retracement from $7.80. Inventory numbers imply $7.80 to $8 is reasonable. As any grain trader knows, wide volatile trading ranges are common when facing the current type of circumstances. Anything from weather to exports can disrupt an assumed trend.

Dollar Loses Momentum

The greenback's situation has become tenuous. While we are still long the index, there is a possibility foreign currencies will strengthen despite trade and interest rate parity. The primary driving force is rumored intervention. Thereafter, robust U.S. economic figures and hints of labor-related inflation raise fears that the dollar will come under attack.

It is interesting to note that inflation is the present day catalyst for higher interest rates. High interest rates have been the incentive to accumulate dollars. Is the logic changing? After exchange rates broke free during the 1970s, traders carefully evaluated trade to determine where demand would take currency parities. With the development of interest rate futures and options along with currency markets, derivative transactions moved the focus from trade to relative yields. Investing is big
business...both importing and exporting. Enormous cash moves from country to country seeking the best return. Hence, T-bonds can play a more dominant role than soybeans.

The June dollar index broke the interim trendline while sustaining above the long term. A break below 9500 violates the long-term line and sets up a test of 9400. Thereafter, we can assume the dollar is responding to more than central bank intervention. Commodex reversed shorts in June and September Deutschmarks while buying June and September yen. It is already long Swiss Francs. This does not paint an encouraging technical picture.

Pork Bellies

Just when I thought bellies were in for a spill, the market makes a gap reversal through our stop to challenge previous highs. It will be frustrating, indeed, if August bellies move to our original entry objective before correcting...for real. There may be fewer pigs, but these are expensive bellies. Frankly, I thought we were well on our way after we dropped our stop to 8935 once prices touched 8767. Then, wham!...they opened through our stop and above our 9085 entry for a loss!

Having taken so much out of the belly/hog spread, the short seemed worth the exposure. Now, it may be practical to view the hog/belly spread. For those unfamiliar with spreads, keep in mind that the long leg (position) is stated first. Thus, a belly/hog spread is long bellies and short hogs. Talking with producers, the consensus is that 8 cents bellies over "lean" hogs is the same as 13 cents in the old "live" hog contract. This approximates the average spread between lean and live hogs as it relates to bellies. If this is true, we are at the upper range of the belly premium. A reversal may be appropriate.

May 8, 1997
Philip Gotthelf
Commodity Futures Forecast
7000 Boulevard East,
Guttenberg, New Jersey

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Relocated 05-09-97
Last updated on 05-09-97

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