‘Turnaround Tuesday’ taking toll on technical trading: Part I

Scott Stiles says timing is everything, and, if he could have his druthers, he would rather have given the talk he gave the Agricultural Council of Arkansas’ board of directors on May 19 a day earlier.

“This is officially turnaround Tuesday,” said Stiles, an agricultural economist for the University of Arkansas Extension Service who is based in Jonesboro. “This last time I looked at the markets today September rice was down 11, December corn down seven, November beans down 12.

“That’s below a key support. If they’re down 12 that means they’re trading at 9.23 so you really, really need to pay attention to where November beans close today if you’re not hedged or priced. Wheat has backed off its highs, and it’s down 15 cents on the July contract.”

Stiles was apologetic, saying he wished he could have given the presentation on May, May 18, when cotton and grains futures had all moved higher because of a rally that began the previous week following USDA’s release of the May 12 World Agricultural Supply and Demand Estimates or WASDE report.

By Tuesday, May 19, the cotton and grains futures markets in New York and Chicago had given back most of those gains, costing farmers who haven’t priced their crops millions of dollars in potential returns at harvest.

“This is how marketing will have to be done over the next few years, but especially for this year,” said Stiles. “It’s going to be very labor intensive. You understand that this is how we’re going to market – we’re going to sell rallies.”

70-cent rally

He used wheat as an example. After May 5, when the wheat market bottomed, the July contract put on a 70-cent rally. “When the market hands you 70 cents on a 6-bushel yield, or $42 a bushel, you have to take that off the table,” said Stiles. That’s how marketing has to be done. You have to sell the rally, sell the rally, sell the rally. That’s your three-step marketing plan.”

Market watchers sometimes forget the impact a bullish move in one crop can have on others. The rally in new crop wheat had the effect of pulling rice, soybeans, corn and cotton somewhat higher during what some might call the spring rally.

“You had this confluence of weather news that came together,” said Stiles. “The knee-jerk reaction in the grain market was this was a fund liquidation, and that’s partly true. The funds have a record net short position in corn, wheat and soybeans. Last week you saw that 15,000 short contracts were liquidated in wheat.”

Driving that move was unusually cold weather in the Dakotas that could cause some replanting of the corn, soybeans and wheat crops in the upper Midwest. At the same time, growers have received too much rain leading to quality concerns in the hard red winter wheat areas of the Plains and even now in the soft red winter wheat areas of the Mid-South and Midwest.

Climatologists seem to be agreed that an El Nino weather phenomenon will occur in full force in September, which could lead to disastrous weather conditions in Australia, India and in other key markets. Australia is the fourth largest wheat exporters, and India has been playing an increasingly larger role in the cotton, rice and wheat markets.

“So you have some weather events that could converge, and then you have to look at the technicals,” says Stiles. “The technicians look at the red line (on a wheat futures chart he displayed). It’s a 100-day moving average, and they said that if the market can close above this 100-day moving average then we’ll move on to that April double-top around $5.42. It didn’t happen, and today you’re seeing the market pull back and correct.”

No fundamental changes

Did the fundamentals change in any of those markets? “Absolutely not,” said Stiles. “There are very few bullish cards in the deck this year when you look at the global fundamentals situation. Wheat, for example, has record-high ending stocks of 201 million metric tons, the highest since 2009. You had record production in the world last year.”

U.S. exports, as a result, are expected to decline from 32 million metric tons to 23.4 million metric tons because of a combination of the wheat surplus around the world and the strength of the U.S. dollar compared to other currencies.

“The U.S. is a residual supplier,” he said. “We export a lot of wheat when there’s a failure somewhere else in the world or the dollar is weak compared to other currencies.”

Stiles suggested growers mark June 30, the date the USDA National Agricultural Statistics Service Acreage Report will be released, on their calendars and plan to have a major portion of their expected 2015 production hedged.

In the March 31 Prospective Planting Report released by USDA, the average of trade estimates was 1.5 million acres above the USDA forecast of 84.6 million acres for the 2015 soybean crop. If achieved, the 84.6 million acres would be a record for the U.S.

Informa Economics, the Memphis, Tenn.-based economic forecasting firm, has released a new estimate that is 2.5 million acres above the USDA NASS March 31 Planting Intentions Report figure of 84.6 million.

“Informa is well-respected. They survey growers, they survey lenders, they survey agribusiness, and someone is telling them there’s more bean acreage out there,” said Stiles. “It would be a nuclear bomb in the soybean markets. If it’s 87 million acres, that would take the carryover estimate from the current 500 million bushels to 600 million, and that gets us back to the 2009-10 lows of $7.86 per bushel.”

For more on the March 31 Prospective Plantings Report, visit http://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1136

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