Grains are on their way down from a big rally in the middle of 2012. The rally started with weekly-scale compressions in the main three, all of which broke up in June. The end of the rally came in August for corn and in September for the other two. Corn and soya beans made weekly-scale top extensions, thereby warning that the move was over:
There had also been a solitary monthly-scale compression (in corn) before the big rally and these have a median life of around a year and a half, so the possibility arose that a larger bubble might be inflating. As usual after a big rise, all the commentary was bullish but we are not always contrarians so we marked this as a possibility.
Since then, we have seen monthly-scale compressions in soya oil that have broken downward. This removes the probability that there may a further ‘leg’ up in a major grain bubble, so we set that idea aside.
Recently, some grain prices have continued to fall away from daily-scale compressions (especially in corn as shown in the March chart below) and have now dropped enough that prices are nearing support from the old weekly-scale compressions in wheat and (almost) in soya beans – see the first charts in this edition. We have also now been seeing some scattered short-term (daily-scale) bottom extensions. These mean that the downward momentum is slowing sharply and that rallies are possible.
So far, no rally has lasted more than a day or so, but they remain likely.
There has been some greater divergence between these markets now that ‘normality’ has been restored - in a panic-driven boom they all move up together - so we shall try to analyse them separately from now on. The longer-term picture seems better for corn than for wheat, as simply concluded from the fact that corn has begun to make these short-term bottom extensions well above the price where we would expect long-term support - at the level of those weekly and monthly compressions.
Soya meal was consistently firmer than soya oil throughout the boom, probably because meal is in demand as cattle feed from meat-hungry China whereas other edible oils are plentiful. This will probably continue and we will watch for clues.
Elsewhere, we pointed out on January 3rd that crude oil had compressed at a weekly scale and might be breaking upward. It did but we still can’t call for a new up-move in price. The ‘product’ markets of Rbob gasoline and heating oil are still stuck in ranges and heating oil re-compressed last week. This compressed condition within a range has yet to resolve, so we remain side-lined. If you bought crude (or want to do so) please don’t risk much – it may simply be making an earlier upward break (i.e leading the move) than the others but we must also see some stirrings in Rbob and heating oil before we become bulls.
There is also a potential feedback situation in crude. Saudi Arabia now apparently needs a price of $100 per barrel of crude oil to balance its budget ( according to the Sunday Telegraph of London). This is despite its huge output and small population but it does mean that this important ‘swing’ producer can no longer be expected to turn the taps off if crude oil prices start to drop. Saudi Arabia borrowed money (secretly) from Abu Dhabi about a dozen years ago, which meant that that country’s prior huge surpluses had all been
stolen spent. If some real weakness develops in energy markets, this important supplier could previously be expected to choke off the flow, so providing the negative feedback that kept prices roughly stable. Now it can’t, so this will be replaced by positive feedback if (or perhaps when) prices next start to fall. More weakness will mean more selling from Saudi Arabia so prices will not stop falling so easily in years to come…