The DeCarley Perspective Trading Newsletter

Grains in the aftermath of USDA and expanded hours

Grain Futures Market Analyasis

**There is substantial risk of loss in trading futures and options.

**Past performance is not indicative of future results

On the radar:

  • Grains in the aftermath of USDA and expanded hours

Corn and Soybean Futures

Corn and soybean futures have suffered in recent sessions on the heels of a stronger U.S. dollar, economic concerns (compliments of European debt issues), and what could be fund liquidation due to government induced margin hikes and position limit increases.  Also, fresh competition in futures clearing has lead to new trading hours and this isn't necessarily welcomed by all, and could be playing a factor in the need for funds to exit the grain markets.

However, in our view each of the bearish items previously mentioned could prove to be rather temporary.  For instance, new leadership in Greece and France causes a certain degree of uncertainty but it might not change the big picture.  In other words, it is quite possible that newly voted officials will find they have little power over the inevitable continuation of austerity and that could divert any major "risk off" plays in the commodity and financial markets.

Similarly, the U.S. Dollar has found itself in favor as of late but there are no guarantees the trend will continue.  Currencies are known for being rather directionless during the summer months and that should work in favor of continued range trade in the dollar and the Euro.  If so, a trip to the lower end of the trading range in the greenback should support the grain complex. 

Chatter suggests that there are significant concerns in regards to the expanded trading hours of CME Group grain futures.  The uneasiness arises from the fact that the new trading hours result in active trade at the time of USDA announcements.  Unlike economic data that can be assessed rather quickly, grain reports take some time to sift through the details and this has encouraged some traders to lighten positions.  In addition, the Obama administration has made a point to implement regulations to limit speculation (primarily in crude oil) through increased margin requirements for floor traders and  position limits.  Coming into last week, large speculators were holding record net long positions in soybeans (nearly 260,000 contracts).  As of Friday's COT Report, the net long position had been reduced by about 23,000 contracts, suggesting we've already seen a considerable amount of liquidation by the so-called "smart money". 

 

We suspect we could see more soybean liquidation, into the $13.80 area, but at some point fundamentals should come into play.  After all, Thursday's USDA report was moderately bullish and we doubt the tight supply scenario will be offset by any decrease in demand in the short-term at the hands of European turmoil. Additionally, the seasonal peak isn't scheduled to come in until late May or early June. If a rally ensues, the first area of resistance will be near $14.55 and then again near $14.85.  Should global equities and commodities (crude) provide outside support, we could see prices as high as $15.20.  

Although corn fundamentals aren't quite as healthy as soybeans, it is quite possible any strength in beans could help revive corn prices.  Also, corn likely won't be immune from a lower U.S. dollar.  If buyers come to corn futures, we should see a run to the top of the channel near $6.20, or maybe even $6.40.  If we are wrong, the next major area of support will be $5.40ish. 

 Corn Futures Contract Chart

Soybean futures chart

DeCarley Trading
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 *There is substantial risk of loss in trading futures, options and FOREX.

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