Pessimistic Agricultural Markets Could Soon Sprout
Agricultural bulls are few and far between. Even farmers, whose livelihoods depend on higher grain prices are mostly negative on market pricing. Our friends at the Consensus Bullish Sentiment Index reported this week that of those polled a mere 33%, 32%, and 31% were bullish in corn, wheat, and soybeans respectively.
For this time of year, ahead of the spring planting season, the sentiment is rather lopsided and, in our opinion, irrationally so.
This widespread pessimism has piqued our interest and leaves us looking for a reversal in most of the domestically grown renewable commodities such as corn, wheat, and soybeans.
With prices and sentiment depressed, we might be close to a scenario in which there simply aren't any sellers left. In fact, Wednesday's price action was indicative of a reversal of that nature. As selling dried up prices stabilized, and bargain hunters look to have been lured into the markets. We will be looking for signs of follow through in the coming sessions to confirm.
The Commitment of Traders Report is currently being reported with a considerable lag due to the prolonged government shutdown earlier this year. However, we can at least conclude that large speculators have yet to build up the typical long position in corn, soybean, and even wheat futures, which is on the opposite growing cycle.
It can be assumed that large speculators are holding neutral or small bullish positions in the grains. This lack of posture leaves plenty of room for those with the deepest pockets to buy agriculture futures should a fundamental story come along, such as the soil is too wet, too cold, too dry, or quite frankly "too anything."
Corn
Corn prices appear to have successfully held support near $3.65. In our view, there is a good chance the market finds a way to move above $3.85. If so, we could have a significant price surge on our hands.
Unlike the stock market which appears to have priced in most of the prospects of a trade deal between the U.S. and China, the grain markets were pricing in a higher probability for a failed deal. Thus, if the two countries can put pen to paper, that alone will be worth a run toward $4.00 in corn. Further, our favorite indicator, the RSI (Relative Strength Index) looks to be reversing from moderately oversold levels.
Source: QST
Wheat
The wheat futures market suffered a sharp decline of roughly 50 cents in a short amount of time. The move was likely more logistical than fundamental in that the selling originated from sell stop loss running followed by panic, and even some margin call selling.
Luckily for the patient bulls, this move brought prices to contract lows and forced the RSI into oversold territory. In our opinion, this is exactly what the market needed to wipe out the weak hands and turn the market around.
Source: QST
Soybeans
The soybean futures chart is healthy, as it should be this time of year. Despite current talk of oversupply, soybeans generally rally going into the spring and summer months as traders put a risk premium on the planting and growing process.
Additionally, the grain markets, particularly soybeans, have been weighed down by concerns over the lack of progress on the U.S. vs. China trade talks. If the equity market is correct that a deal of some sort is in the works, we could see a push in soybeans toward $10.00 per bushel, which happens to be the top of the trading channel.
Source: QST
In summary, despite the lack of attention the grains markets are getting they could be where the best opportunities are.
There is an old saying in commodities; "the cure for low prices is low prices." Renewable commodities, such as the grains, are generally an exemplary example of this. They can become cheap. They can even fall to levels below the cost of production, but as farmers and end-users alter behaviors to accommodate the environment, pricing can quickly reverse course. We are looking for exactly that in markets such as corn, wheat, and soybeans.
At the time of publication, Garner was short July Corn 390/350 vertical put spread; short May Wheat 375 puts and long April 360 puts; long July soybean meal futures and short July 320 calls.
*There is a substantial risk of loss in trading commodity futures, options, ETFs. Seasonal tendencies are already priced into market values.