We seem to be locked into trading ranges on the Chicago Board of Trade. In absence of news, the market cycles higher and lower, leaving few clues to assist our trading.
Since USDA provided us with new information in early January on the final crop sizes and some supply and demand news, we have traded in the dark.
Markets reacted strongly over two days from news of a larger-than-believed corn crop, then rallied back to the recent highs. A sharp decline for most of two weeks followed that.
Take the March corn. Futures prices dropped most of 57 cents after the USDA report of crop size. We hit a low of 3.58-3/4 on Jan. 14, just two days after the report. We quickly bounced 48 cents of that, however, with a high of 4.07 on Jan. 20. We dipped, then hit another high of 4.02-1/2 on the 26th.
It was here that the corn market got funky. After apparently shrugging off the report, we could find no good news to continue the rally. Prices declined for eight straight days, just when farmers starting giving me targets again.
Then, last Thursday we seemed to bottom out. Thursday and Friday showed big gains, and there was follow-through Monday. However, after higher prices Monday, as high as 3.83 March corn futures, we fell back to close fractionally higher at 3.77-1/2.
At the higher price Monday, it felt like we could go back to break $4. Now it doesn’t, and the overnight Monday/Tuesday is down 1-1/4 cents. Bummer! (I went to college in the ’60s, and that remark proves it!)
Soybeans are a similar issue. The high was the day of the report, but we crashed over a dollar immediately. Over the course of a couple of weeks, we have gotten 61 cents back to the high Monday at 10.19.
We have been up and down in between, but the beans have shown a steadier rise than the corn. Beans have continued the climb in the overnight Monday/Tuesday, up 7-1/2 to 10.09-1/2. If that doesn’t seem to make sense, the high of 10.19 did not hold Monday. We had a 24-cent range, and the beans closed at 10.02.
So, we have a trading range, where prices go higher, traders reverse near the old top, take profits and sell short. They run the market down, take profits on the bottom. In practice, traders exit a little before the old high and a little before the old low.
This makes a pennant formation on the charts, as the range gets smaller and the formation starts to work toward a point. This demands that, as the range becomes very small, we breakout one way or the other.
My fear is that the beans break out to the downside, while the corn breaks up.
The reason is simple. I talk every day to farmers who intend to lighten up on corn acres because of production costs. Costs got run up in the corn expansion as we competed for fertilizer and seed. Those costs have not declined as much as the crop values.
If this is a widespread trend, we have big news in the next real fundamental source of news, the March 31st USDA Planting Intentions Report. Cut corn acres and we change the whole picture. With this rally back in beans, farmers need to move beans before traders start anticipating bean acres.