The El Nino Commodity Trading Guide: Watch Out For Wheat

With each passing week it appears the odds are increasing for the weather phenomenon known as “El Nino.” Check that…the odds are increasing for a “Super El Nino.”

Yeah, sounds serious.

The last time we had one of those was in 1997-1998. Forecasters suggest the probability of an El Niño is now above 70%, which I hear is an unusually high probability estimate considering the time of year, hence the “super” talk. Of course, high probability does not mean certainty and especially this early in the year; it could be a repeat of 2012 where in the 11th hour El Nino never materialized.

While we anxiously await the latest Pacific Ocean temperature readings, history tells us that El Nino years can significantly influence commodity prices across the globe. The Wall Street Journal recently came out with a useful infographic on key commodities that often experience price spikes including coffee, wheat, corn and cocoa as well as metals such as copper and nickel. Apparently El Nino usually leads to excessive rains in Chile that can flood copper mines.

Of the list, wheat is the most intriguing. The Chicago wheat contract bottomed out around $6 per bushel in March thanks to healthy worldwide stocks. However, those numbers are being slashed as I type thanks to a combination of winterkill, dry weather and now excessive heat in the main winter wheat growing areas of Texas, Oklahoma and Kansas.

The main winter wheat growing areas of California and the plains are smack in the middle of severe drought areas

The main winter wheat growing areas of California and the plains are experiencing severe droughts

On top of that, the crisis in Ukraine continues unabated, adding even more risk premium to a market that fears unrest will curtail exports and possibly reduce yields. Throw in a dry growing season in Australia, a common occurrence in an El Nino year, and we have another fundamental bullish bit of news to keep the market climbing.

As of this writing, the front-month Chicago wheat contract sits around $7.35 as it continues its bullish price trend off the March lows. It’s still early to start talking about breaking the contract high of $13 per bushel, but the game pieces are in place for that potential.

When Will Range-Bound Soybeans Break Out?

In the grain markets 2013 ended with a whimper and has continued to whimper through January. After a phenomenal harvest in North America, especially after the drought of 2012, both the corn and wheat markets remain mired in long-term bear markets. Soybeans have held on to maintain contact with the teens…more on that later.

Corn, especially, has been grinding lower within a tight range; its average true range on the daily charts has dropped below six cents a bushel. Chicago wheat has lost a dollar per bushel in the past two months thanks to large global stocks and a lack of strong demand. Technically, Chicago wheat is vastly oversold and can’t seem to bounce higher despite the threat of Midwest winterkill and recent purchases from the Middle East and Asia.

Soybeans Avoid the Doom and Gloom

Soybeans have managed to defy gravity, or at least stave off a full-blown bear market. The reasons cited are innumerable, with shear demand for North American soybeans as the prime culprit. Soybean orders for the current marketing year remain far ahead of the USDA estimates and the rates of the recent past. Traders keep expecting to see cancellations with the South American harvest around the corner but that isn’t happening, keeping prices buoyed.

Regardless of the reasons, the price tells the story.

After the front-month soybeans contract touched $14 a bushel during the end of August, it has settled into a dollar range between $13.50 and $12.50 per bushel. The bulls and bears are fighting for control and lately the bears have managed to keep the price below the teens with eyes toward a big South American crop. Recent rains in Argentina have calmed fears about heat-stressed soybeans and initial harvest reports from Brazil are pointing to expectation-beating yields.

The potential symmetrical triangle forming on the weekly soybean chart suggests a breakout coming soon.

The potential symmetrical triangle forming on the weekly soybean chart suggests a breakout coming soon.

Each week I keep thinking soybeans will give way to the 11s, but each week a new bullish storyline emerges, including:

  • The Devaluing of Argentina Pesos: With double-digit percent loses in the currency, Argentinian farmers may be reluctant sell soybeans.
  • Lack of Improved South American Infrastructure: South America has emerged as the world’s top soybeans exporting continent, with Brazil at the top. However, the ability to physically export the increasingly larger crop each year has not kept pace. Last year buyers waited months to get their beans thanks to logistical issues at Brazilian ports. The USDA attaché in Brazil called the logistical improvements “marginal” – not exactly instilling confidence in global soybean buyers.
  • China Using Soybean Import Contracts as Loan Collateral: Due to tightening credit markets in China and the government cracking down on shadowing banking, DTN’s China correspondent Lin Tan, speculates that private companies can gather “credit from the bank much easier by using soybean import contracts as collateral because it’s normal import business.” He estimates that China may cancel 73.5 million bushels worth of soy, but so far that hasn’t materialized.
  • Threat of February Dryness: Although South American growing regions have experienced solid rains lately, there remains risk premium in the market should the weather turn dry.

Despite these recent developments, longer-term data remains bearish. Oil World told Bloomberg World production of soybeans will be 287.8 million tons, up from an estimate in December of 287.6 million tons. Furthermore, the spread Between North and South American soybean prices provides a dollar-per-bushel discount for those buying from Argentina, for example, versus the U.S.

Heading into the next few months, I maintain a bearish bias looking for a downside breakout below the $12.50-60 range. However, should the situation continue to evolve and gain bullish momentum, I’ll be looking to enter above the December highs of $13.50 should we get there.

For now, I will sit tight and wait for the breakout.

The Top 10 Handles for Grain Futures Trading on Twitter

Want to stay up on real-time news and data for agriculture futures? These 10 pros on Twitter are a great place to start.

10) Angie McGuire (@GoddessofGrain) – The Goddess of Grain is VP of Grains for Citizens LLP and is guaranteed to provide a few chuckles. She mixes in her grain market tweets with plenty of sass and humor. She often has her ear to the ground concerning the rumors and chatter that surround the cash basis for grains, which at times can be useful for tracking price in the futures markets.

9) Agriculture.com (@Agriculturecom) – Agriculture.com is a superb media property for tracking the daily market movements of soybeans, corn and wheat. Its Twitter handle provides a useful method for staying up on the site’s freshest, most important market commentary. They have a reporter on the CBOT floor who provides play-by-play commentary of the action in the pits.

8) Dave Fogel (@ATI_DaveFogel) – David brings nearly 30 years of agriculture risk management experience to his Twitter account and it shows. Based in Bloomington, Ill., he stuffs his Twitter stream with updates on grain basis and insights from across the globe I wouldn’t otherwise know about. His no nonsense approach to Twitter provides breezy, easy-to-understand summaries of what matters most to grain buyers and sellers—vital information for any grain trader.

7) Gavin Maguire (@RtrsAgAnalyst) – Gavin is an agriculture columnist and analyst for Reuters who is a big picture thinker with gorgeous fundamental grain charts to match. For example, for the January 10 USDA report, he posted on Twitter a graph of the daily corn, wheat and soybean markets reactions to the report dating to 1986. That’s great stuff you won’t find easily for free.

6) Julianne Johnston (@julijohnston) – I’ve discovered that grain market analysts are primarily male, but that doesn’t stop Julianne from providing some of the best market commentary and insight around. Working for Pro Farmer, she is always there to provide timely export, cash basis and insights from around the Pro Farmer ecosystem. When its crop report time I make sure to keep close tabs on her handle for updates.

5) Jason Britt (@jasonlbritt) – This broker out of Missouri isn’t afraid to call it likes he sees it, providing an inside look at the psyche of a trader. He also shares the wealth, posting timely articles and keen insights from other industry experts. Topics include the weather and juicy rumors from his network that would be otherwise impossible for outsiders like me to ever hear about.

4) Tregg Cronin (@5thWave_tcronin) – A self-described “futures trader/technician/production ag/Canadian whiskey advocate” from South Dakota, he provides very unique and in-depth analysis of all types of agriculture products from the traditional grains to farmland prices to milk futures. Anyone curious about smaller agricultural markets best pay attention to Tregg’s tweets.

3) Bryce Anderson (@BAndersonDTN) – During the great Midwest drought of 2012, I was glued to Bryce’s Twitter feed. He is the senior agriculture meteorologist for DTN and provides real-time updates on weather patterns and forecasts for the world’s important grain growing regions. He does not tweet every day but when he does Tweet, I never fail to take a look.

2) Darin Newsom (@DarinNewsom) – Based out of Omaha, Nebraska, Darin is arguably the most talented pure writer out there I’ve found covering the grain markets. Equally versed in fundamental and technical analysis, his “technically speaking” blog is can’t miss stuff. From time to time he will also provide insightful technical analysis on outside markets, including oil and gas. Although a lot of his content resides behind a firewall at the DTN Progressive Farmer website, he provides plenty of invaluable information for free via Twitter.

1) Arlan Suderman (@arlanFF101) – When it comes to the grain and cattle markets, Arlan is your guy on Twitter. Not only does he provide superb information on what he is seeing for corn, soybeans, wheat and cattle, he does so seemingly effortlessly and immediately. He is the one I turn to first when the latest USDA report crosses the wire. As a senior market analyst for Water Street Solutions, Arlan is primarily focused on fundamentals and leaves some of the hardcore technical charting to others.

Honorable Mentions

There are way more than 10 great follows on Twitter for grain traders so I encourage you to also check out @IndianaGrainCo, @StandardGrain, @WhiteWheatTweet, @morrisonmkts and @TonyRohrs to name a few more. They all provide great insight into what’s happening in the markets.

Who do you recommend following on Twitter?

The Soybean Dilemma: Beans in the Teens No More?

Despite the third largest North American crop on record and an anticipated strong South American crop, soybeans remain the bullish leader of the grain complex with the January contract hanging around the $13.30 per bushel range. Notwithstanding the yield recovery following the drought last year, soybeans prices have lost just 5.5 percent. In comparison corn has trimmed 40 percent.

‘Beans in the teens’ as the phenomena is often described in trading parlance, usually denotes bullish price action often associated with supply issues and weather scares that push prices to $13 a bushel and higher. This year farmers experienced more favorable weather and a strong bounce in overall yields despite a mid-summer weather scare. The dry August added risk premium to the market and sent the front-month contract price of $11.65 in August to a high of $14.09 per bushel a month later. In the end, the dryness had limited influence on the crops and prices drifted lower into the fall.

The trend turned bullish again after the WASDE report on November 8. Soybeans shot up 30 cents in one day despite the fact the department raised its average yield-per-acre estimate 1.8 bushels above its September guess. The one percent decrease in total acres harvested offset the gain in yields, generating what many analysts called a neutral report. In hindsight, that report was bullish as the USDA appeared to massively underestimate demand.

China’s Insatiable Appetite for Soybeans

Despite the fantastic harvest in the Midwest, prices remain elevated and industry insiders point to China. Unlike corn or wheat, there are few sources for soybean exports. The U.S., Argentina and Brazil provide the vast majority of the world’s supply. Watching a rapidly depleting pile of soybeans available in the U.S., the Chinese are either unwilling or unable to curb purchases until the South American crop details emerge.

Grain analyst Dave Norris thinks China isn’t taking chances for fear of a delayed crop in South America and logistical problems exporting beans from the continent. After the last harvest, ships waited as long a month to pick up shipments in Brazil ports. Norris told Bloomberg that sales and shipments since the marketing year began September 1 totaled 36.79 million tons, 93 percent of the total the USDA expects to export in the full season.

The reality is China may not have a choice. The Chinese middle class is larger than the entire population of the U.S., and as China continues to grow its economy the average citizen can afford to eat more protein. China must continue to import record amounts of grain to match the rising affluence of its populous.

 

Brazil ports lack the infrastructure to match export demand

Brazil ports lack the infrastructure to match export demand

Will Prices Finally Fall?

Should the South American crop grow as planned, the increased supply may finally squelch the record demand. Societe Generale (SocGen) and broker RJ O’Brien told Agrimoney.com that the high soybean prices relative to corn will push South American farmers to take away corn acres and plant more beans. By June, SocGen predicts soybeans prices will hit $11.50.

I am not in the prediction game, but for prices to fall significantly, a lot must go right in South America this growing season. The fall harvest in North America went as well as one could hope for yet we still have beans in the teens.

For the bears, they can take solace in contango. Today, the market believes future soybean prices will dip below $13 when the May contract comes off the board. Keep an eye on spreads as we close in on the next South American harvest for clues on the market’s direction.

The Right to Choose: EPA Ethanol Mandate in Context

Much of the American agriculture industry has been adamantly opposed to the EPA’s recent decision to cut the amount of ethanol that must be added to the nation’s fuel supply – by about 3 billion gallons in 2014. Although such a decision will most likely hurt demand for ethanol, and ultimately the price of corn, as roughly 40 percent of our nation’s corn crop goes to fuel use, it is the right thing to do.

But don’t take my word for it.

American farmer Cory Ritter impassionedly explains in his blog that, at the end of the day, the customer should have the choice to purchase fuel with ethanol or not. The ability to choose is a fiercely held American value, so why take that away? As Cory points out, he is more than happy to grow non-GMO soybeans on his farm for a $2 premium per bushel. If customers want ethanol, or non-GMO soybean for that matter, they deserve the right to purchase those products.

The custom in the U.S. on Thanksgiving is to reflect on the past year and think about what one is thankful for. This year I’m thankful for the ability to choose. I wouldn’t have it any other way.

Cory Ritter’s blog post: Are You Angry Over Choices?

USDA WASDE: Get Ready For Friday Fireworks in the Corn and Soybeans Markets

Arguably the most anticipated event of the year for any grain trader is upon us: the November USDA Worldwide Agricultural Supply and Demand Estimates (WASDE). Scheduled for release on Friday at noon ET, this report is virtually guaranteed to move the grain complex. Which direction is the billion-dollar question.

The November report is always a big one, but this year’s edition holds extra significance as the USDA canceled the October report due to the partial Federal Government shutdown. The lack of official government data at such a critical time of the annual North America farming cycle has the potential to create lock-limit moves across soybeans and corn, in particular. The October cancellation was the first ever in the USDA’s 150-year-plus history, setting up potentially unprecedented movements in price.

Analysts Expect Bearish Numbers

Since the last WASDE release on Sept. 12, corn and soybeans have remained markedly bearish. John Payne at Daniel’s Trading in Welcome to WASDE Week points out:

  • December corn has lost 45 cents and counting.
  • November soybeans has shed $1.40 off its price.

Despite some hot, dry weather in August, anecdotal yield reports from the fields have surprised to the upside and the downtrends in corn and soybeans reflect this sentiment. Todd Hultman, a DTN grains analyst, believes soybean and corn output will land on the high end of previous USDA estimates based on pre-report guesses he has witnessed:

Throughout 2013, USDA estimates of the corn crop have ranged from a low of 13.76 billion bushels in August to a high of 14.14 billion bushels in May. Soybean estimates have ranged from September’s low of 3.15 billion bushels to July’s high of 3.42 billion bushels. As we approach Nov. 8, pre-report guesses are expecting corn and soybean numbers at the high end of this year’s estimates. (How Good is the November WASDE Report?)

Regardless of the final numbers we see in the WASDE, the November report is usually fairly accurate. Senior analyst at Water Street Solutions, Arlan Suderman (a must follow on Twitter @ArlanFF101), notes that the disparity in estimated soybean yield per bushel from November to the final report range from 0.4 to 0.7. For corn, the difference can range up to two bushels either way. The real wild card is which direction output will land—more or less. Looking across the last twenty growing seasons, the final soybean yield was larger than in the November report 12 times and smaller eight times. For corn, the final yield was larger 11 times out of 20.

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Soybeans May Lead the Market After Friday’s Report

A focus on Demand?

Assuming the soybean and corn output does match bearish expectations, all attention will turn to demand. In the past few months, demand for both crops remains robust. Big sales headlines have helped keep the grains from completely succumbing to a full-on bear market. The respective estimated carry-outs could play an even larger role than supply in how the markets react Friday.

News You Can Use

Regardless of the USDA data revealed Friday, I will be flat at its release. In a world of high-frequency and programmatic trading, the volatility just seconds, let alone minutes, after the report’s release can inflict pain on a small-fry investor like yours truly. I will bide my time and wait for a direction to be established before I act. At the end of the day, it is not the data itself that is important, but how the market reacts to it. This is as true today as it was 100 years ago.

Before you consider trading the November WASDE, I highly recommend checking out Trading Commodities and Financial Futures, Fourth Edition by George Kleinman, president of Commodity Resource Corp. In the book, George describes his “GK’s significant news indicator,” which is essentially the price before the release of market-moving news. Use this as pivot point to help determine where to enter and where to place a protective stop. It can help you keep perspective and a level head when markets are moving and emotions run wild.

Best of luck Friday!