July 8th, 2002

Grain Report

by Head Analyst James Mound

General Commentary – Grain markets have exhibited signs of breaking out of long term depressed pricing, but this appears to be a false move.  Historically speaking, in the 66 year history of beans on the CBOT, the market has spiked in price by at least 40% (to over 200%) at least once every 5 years.  This can mainly be attributed to repeating weather patterns and rotation of inventory levels.  Clearly, the 4 year run of sub $6/bushel bean prices has ignited hopes of a ‘sooner rather than later’ rally.  There are significant reasons why the market will not continue to run over the next several months.  The market is relieved to have strong export demand from China and other nations, hot and dry weather, decreasing inventory stocks, oats running and supportive USDA reports.  However, the market is not fully taking into account the incredible surplus of carryover inventory stock from last year, the potential for declining trade relations with China, cheaper foreign prices entering the international trade market, and the likelihood for market destroying rain or cooler weather.  Moreover, the theory of oats as a forecasting tool is dead.  If anything relating to oats as a forecasting tool was valid it would be as a false indicator over the last decade.  Oats running only suggests a false follow-through in grains.  The market is running on false hopes and rally hysteria, rather than the more rational wait and see approach.  Long term the market will run.  The weakening supply picture will help clear inventories and setup a run for early next year. 

*** This 30 year chart of soybeans illustrates the repetitive pattern of a beans run at least every five years, as well as the recent 4 year weakness in the market.  The market may have reached a bottom, but nothing fundamental has suggested this is a real run.  Expect prices in grains to retrace 10-15%.

Beans –        Beans:  Despite breaking the highs set in early 2000, the market must break $6/bushel to even hint at a real run.  Fundamentally, the market would need a ruined crop to see a real rally.  Expect a retracement to prices hovering above $4.50 as the market should stay above lows set at the beginning of the year.  Long term, beans offer a positive spread outlook against meal and oil.  China has threatened to tax oil and meal as a retaliatory reaction to US tariffs on China imports.  This leaves beans open to beneficial demand and exposes meal and oil to reduced demand abroad.  Seeing a short-term retracement in prices, spreading (long 2 bean to short 5 meal or long 1 bean to short 4 oil) should prove profitable. 

Bean Meal & Oil:  Bean derivatives’ growing strength against bean

prices over the past few years suggests that relative strength here is high.  The market is overdue for a pullback in prices by comparison to beans, and should see some weakness due to China’s stance on retaliatory taxation of meal and oil and not beans.  Spreading bean meal or oil short against any other grain long should be a profitable proposition over the next two years. 

***Bean oil, with almost an identical chart to meal, illustrates the stronger price support as compared to beans.  Notice the recent bottom staying above the lows set in 86, versus beans which have stabilized at lower prices.  Also, the fall from the highs set in 98 represent about a 50% drop in prices, while beans showed more than a 55% drop.

Other –       Corn:  Corn faces some unique fundamentals this year.  The long term overview suggests corn will face the greatest difficulty in reaching substantial highs, as only by a substitutive nature will corn run.  Shorter term, recent weather suggests hot weather lasting close to the end of July will ruin a large part of this year’s crop and therefore corn may see a rally.  Overall, I don’t see this happening and therefore see a swift drop in corn prices reflecting lack of weather follow through.  Nevertheless, many market participants should see recent weather as a reason to buy up corn.  From a supply and demand perspective there is little motivation to buy corn over any other grain.  Growing commercial short positions and heavily weighted long to the spec side suggests we will see some serious selling pressure on any type of weather shift.

                   Oats:  Oats have surged ahead of a true grain rally, with some old school players biting on the idea of oats being a real forecasting tool.  Fundamentally oats have shown stronger USDA numbers promoting the rally, but could easily be considered overbought at this point.  Any lack of follow through in grains will give the market a lot of room to send oats to much lower levels.  Technically, there is almost a perfect triple top trend line resistance on the spike highs of ’88, ‘96 and ’02, suggesting a near term high is set, and relatively sharp decline is ahead. 

Rough Rice:  Rough rice offers some divergence from recent grain

gains.  Prices have been in steady downtrend for over 5 years.  In fact, a monthly chart illustrates virtually perfect trend line resistance over that time frame.  Moreover, the market is near breaching that resistance, with a break above 5 being a clear move through resistance.  A break through 5 should offer a clear run to 7, with a break above that offering clear sailing from there.  Unlike other grains, commercial interest is relatively neutral, with growing buying interest visible over the past few months.  Also, rough rice offers a value at these prices and should find overall buying interest and price support should we stay at these levels.

***The monthly rough rice chart shows the clear trend line resistance dating back to early ’97, as well as tremendous price support at 3.50 and a significant resistance line at 7.

Wheat:  Wheat faces the toughest battle among the grains moving

forward.  Winter wheat production and ratings are as bad as I have ever seen, but the news is out and the market has rallied.  This leaves the market disproportionate to other grains and ready to fall on any sign of a lack of follow through on corn.  From May 28^th to June 27th, wheat exceeded corn gains by approximately 24% and beans by 55% (see equation breakdown below**).  Spring crop conditions should trail that of corn, and be less affected by recent hot and dry weather.  If we see real rain along the corn belt by the end of July wheat prices should tumble hard.  Otherwise, it should trail a rally in corn, making it a short spread play against beans or corn.

**Wheat price change on a percentage basis calculated as follows: 316 (price high on 6/28) – 274 (price low on 5/28) = 42 = 15.3% price gain on 5/28 low;  Corn: 237 (price high on 6/28) – 211 (price low on 5/28) = 26 = 12.3% gain from 5/28;  The 15.3% gain in wheat is 24% greater than the 12.3% gain in corn.  Likewise, soybeans showed a 47 point gain, or 9.9% gain from 5/28 low, which means a 55% greater percentage gain in wheat versus beans.

***Charts provided by:

Moore’s Research Center Inc. (MRCI) available at www.mrci.com

Barcharts, available at www.barchart.com

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