Corn and Wheat Futures

These grains are in the midst of a rally that spans five months and counting.

• Corn, since bottoming in December at $4.10 a bushel – the lowest since August of 2010 – has rebounded more than 25% to $5.14 this week.

• Wheat has been even more impressive. Since bottoming at $5.5025 in January – its lowest since July of 2010 – wheat has clawed back more than 34% to $7.3775 this week.

“Market trend is up,” reads one technical analysis. “The market is extremely bullish. Everything in this indicator is pointing to higher prices,” it extrapolates.

But are corn’s and wheat’s technical analyses confirmed by market fundamentals? You betcha. In fact, it’s the fundamentals that have been driving the technicals. This year, two archvillain fundamentals have joining forces, sowing double trouble for the grains.

An Irate Mother Nature

In agricultural commodities, just one word is all it takes to trigger frenzied buying – drought.
“Weather conditions in the southern Plains turned hot, with temperatures reaching over 90 degrees Fahrenheit in many locations, and reports of temperatures over 100 degrees in south central Kansas,” informs Sterling Smith, grains market analyst for Citigroup.

This hot weather only adds to the damage the soil has been suffering for months. “The crop came into this heat already stressed from cold weather and stressed from an ongoing drought,” Smith compounds.

The hard red winter wheat variety has been hit the hardest, and is likely to get worse. “Look for winter wheat conditions to decline in the west,” Benson Quinn Commodities advised.

Just how potent is this heatwave expected to be? MDA Weather Services anticipates rainfall of just 1.5 inches “at best”, and only on 20% of the southern plains. 80% of the wheat harvest could be severely weather damaged.

In the case of corn, however, there could be a little too much rain in its main growing regions to complete the planting of this year’s crop. The planting of corn in the U.S. typically runs from April to June. This year, corn planting has been off to a slow start, which does not bode well for supplies come harvest time.

Heavy rains fell in much of the Midwest during April, muddying fields and slowing planting machinery. In other regions, this winter’s coldness is still in the soil, forcing farmers to wait until the ground warms to acceptable temperatures. By the end of April, only around 19% of this year’s corn crop had been planted, well behind the 5-year average pace of 28% by that time.

Until recently, the expectation was that warmer and drier weather in May would allow farmers to catch up with their planting operations, which caused futures prices to fall last week. But more rain than was previously anticipated has now been forecast in corn producing regions, in contrast to the drought in wheat fields.

By the start of this week, only 35-40% of the new corn crop has been planted, still behind the average 47% by this point in the planting season. Although Reuters calculates the planting is only 33% complete, meaning that farmers have fallen further behind than last month, and may yet fall farther next week. As a result, corn futures are once again on the rise, growing 3% this week so far.

One Breadbasket in Chaos

Geopolitical tension is the other villain teaming up with Mother Nature to wreak havoc on agriculture prices. The effect of the crisis in Ukraine on grain futures prices is clearly evident when looking at the charts below, with corn and wheat mounting about-faces in December and January as the tensions intensified.

Known for its sizable wheat production, Ukraine actually produces more corn than wheat – being the 5th largest corn producer (31 million tons), while only the 9th largest wheat producer (22 million tons), by 2013 estimates.

As the region seems to be marching steadily toward more heated conflict, the disruption to Ukraine’s grain exports is already being priced into the futures. “The continued spiral into what looks like potentially a civil war in the region is a concern and cause for speculative buying [of futures contracts],” director of agribusiness at Archer Financial Services, Greg Grow, cautioned. “As violence continues to spread in the country, it could be an impediment to timely shipments.”

As Ukraine exports fall, the global demand for grains will have to be supplied by other breadbasket regions, including the central plains of the U.S. and Canada. By late last week, U.S. corn exports had already reached the top-end of the expected range, climbing to 1.24 million tons, higher than the previous week’s 1.16 million.

The Technical Picture

Normally, just one of these fundamental factors would be enough to boost grain prices higher. But as the following charts show, combining adverse weather with a geopolitical crisis makes for a lethal combination.

Source: TradingCharts.com

In the following excerpts from TradingCharts.com’s technical analyses of corn’s and wheat’s weekly charts above, the red line serves as the short-term fast moving average, the gray line serves as the long-term slow moving average, while the blue line serves as both the short-term slow moving average and the long-term fast moving average. The indexes referred to, such as the RSI (relative strength index), the Stochastic Indicator, and others are not depicted above.

• Short-Term Moving Averages: Both corn and wheat are bullish because the fast moving averages (red) are above the slow moving averages (blue).

For wheat, the market is “extremely bullish. Everything in this indicator is pointing to higher prices” – the fast average is above the slow, both averages are up from the previous bar, and the price is above both averages.

For corn, the market is “bullish. Recently the market had been extremely bullish, however currently the market has lost a some of its bullishness”, since the fast moving average is down from the previous bar, and the price is below the fast moving average. “It’s possible we may see a market pullback here.”

• Long-Term Moving Averages: Both corn and wheat are bullish because the fast moving averages (blue) are above the slow moving averages (gray).

For both corn and wheat, the markets are “extremely bullish. Everything in this indicator is pointing to higher prices” – the fast averages are above the slow averages, all averages are up from the previous bar, and prices are above all averages.

• Other Indicators for Corn: Bollinger Bands, Momentum Indicator, RSI, Rate of Change Indicator and the Stochastic all indicate corn is overbought, and that “a modest downturn is possible here”. While the MACD (moving average convergence divergence) is in “bullish territory”, its short-term trend is up while its long-term trend is down, which may indicate a “decline within the next few bars”, meaning weeks.

• Other Indicators for Wheat: Bollinger Bands, Momentum Indicator, RSI, Rate of Change Indicator and the Stochastic all indicate wheat is overbought, but no downturn is indicated by them. Bollinger Bands further indicate that wheat “may continue to become more overbought before reversing”, and “the chance for further bullish momentum is greatly increased”. The MACD is in “bullish territory” in that both its short-term and long-term trends are up, which “may result in additional bullish momentum”.

Investors’ Corner

So while corn looks to have lost some of its bullishness recently and may be due for a slight pullback, wheat still looks like a bull in full charge. In both cases, however, the technicals have not issued outright sell signals. In fact, the way the charts look currently, any “pullback might turn out to be a good buying opportunity”, the analysis speculates.

Factoring in the fundamentals, there certainly seems to be no end in sight for the grains. If civil war breaks out in Ukraine, or worse, if the situation escalates into a regional war (unlikely, but possible), in such cases the grains could carry on their bullish rampage into next year.

Investors who are interested in the grains, but are a little trepid about diving into the futures market with its high volatility and leverage, might consider the largest agricultural commodities fund – the PowerShares Agriculture ETF (NYSE: DBA), which has climbed from $24 in January to $29 currently for a gain of 20%. Its top 9 futures holdings and their weightings include:

Sugar #11 (13.36%), Live Cattle (12.68%), Corn (12.17%), Soybean (10.69%), Cocoa (10.05%), Coffee (9.52%), Lean Hogs (7.64%), Wheat (6.38%), and Cattle Feeder (4.54).

Joseph Cafariello