Technically Speaking: Shock and Awe 101

04:29PM Apr 01, 2019
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The long corn/short bean spreaders were caught again leaning the wrong way and the exit door wasn’t big enough to let long corn folks out quick enough. 
( AgWeb )

If the early average trade guesses ahead of the Prospective Plantings and Grain Stocks reports are any indication of the majority in the media, April Fool’s Day came at 11:02 a.m. last Friday and then again at the close when the CME posted a 17¢ day down in corn. (Read More: Jerry Gulke: USDA Shock and Awe)

Conventional trading wisdom would have one to believe corn had the best chance of a rally, and I didn’t have much of a disagreement with that theory. After all, a 10 million metric tonne of buying by the Chinese would mean a 400-million-bu. purchase offsetting a 1.8-billion-bu. carryover. That would get the expected carryover, if purchased quickly, to levels that supported $4, especially with the well-advertised flooding in the Midwest. 

This bias likely had traders long corn and short soybeans, as a spread trying to mitigate risk. After all in the eco-political climate of tariffs we are in and leaders with an ego deciding our fate, one can’t take too many risks. However, what looked safe, turned out to be another massive mistake creating a collapsing posture quickly for corn prices. Although prices rebounded Monday, April 1, it is not known yet whether it was a dead cat bounce or a change in mentality is at hand. 

The USDA numbers showed the vast majority missed the acreage mark big time, so much so that the long corn/short bean spreaders were caught again leaning the wrong way and the exit door wasn’t big enough to let long corn folks out quick enough. 

A point has to be made again that the report Friday was a “survey based” situation and not something made up by the USDA. Producers who responded to the survey stated their “intentions” as of March 1, as were the stocks in all positions stated as of March 1. The survey lasted from March 1-10, approximately. There is obviously a weather event that occurred since then, likely making the survey somewhat fluid as things can change and/or Mother Nature forces us to change. Nevertheless, a shocker except for the client survey reveal by Gulke Group clients. 

Finding an extra 268 million bu. in stocks is like finding nearly 7 million metric tonnes already on-hand (in bins) of the 10 million tonnes the market was/is hoping China would buy, which might be a stretch in the first place. Looking at it another way, we found about a 1.5 million acres worth of production—without growing it—making the acres intended to go to corn that much bigger.

Our Gulke Group client survey performed well again this year with our corn acres coming in 85,000 acres within that of the USDA report, and within 500,000 acres of the soybean number. Our survey prompted an increase in coverage of production just prior to the report. Regardless of the final numbers in the June 30 report, not having to contend with that gut-wrenching feeling of watching markets collapse is worth the time and effort involved in doing our due diligence. It is more important to do right than be right. 

Compared to the average trade guess as reported by Reuters earlier last week, the average guess missed the market by 1.5 million acres in corn (too low) and 1.5 million acres in soybeans (too high). The trader survey included some top named think-tank firms and some brokerage firms well known in the ag business. A list, as reported by Reuters on March 25 and released to the media, is shown below: 

(click to enlarge)

2019 estimates for corn, soybeans, wheat
 
The drop in corn by 17¢ amounted to about $34/acre loss of gross income based on a 200 bu yield. Traders likely extrapolating Friday’s numbers in to what the USDA will release in their S/D report next week. More acres of corn and more current stocks coupled with a now fledging export program for corn leaves stocks at the end of this year and for 2019/20 at levels in big disagreement with those expected just a few days ago. 

The bottom line is the shock of the report will take time to digest and to understand the potential impact to ag profitability. Unfortunately, the supply/demand situation did not get better and we are uncompetitive in the global arena in corn, soybeans and even wheat suggesting further we may now need China more than they need us? We need to see negotiations to show a solid amount of increase in demand that is verifiable and sustainable from China whether they need it or not and that needs to happen quickly. 

My fear is enough time and slack in negotiations has transpired, including China making side deals with other countries (some of them our friends, if we indeed have any left). China can do the math and it must be obvious that a “no deal” means ag states will likely not vote in 2020 as they did in 2016. If China feels they can get along better with a no deal than a poor deal, we are dealing with a whole new situation where only Mother Nature can provide a fix either in the U.S. or another major exporting country. We now have the opportunity of seeing too much of everything. Now whose back is up against a wall?  

An updated review of pertinent charts that I’ve repeatedly shown before are below for your information in hopes they will be thought provoking. Absent are various technical studies and indicators we use on a private basis for current clients. Study the charts until they speak to you. Supply and demand tables are not shown but rest assured they did not get better, including soybeans. 

(click charts to enlarge)

July 2019 soybeans

 

July 2019 corn

Most in the media are not willing to deal with the change in agriculture that may be an important influence in our longer-term profitability. Hope and change is still with us, but the players and circumstances have changed. Never have so few had such an influence on the ag sector. This past year has given new meaning to government control and influence, both of which we thought were replaced by a freer market-place!  
  
If you got fooled by the report, perhaps we can help. The bottom line is good advice can be priceless, bad advice isn’t worth the paper it is written on. I have made an attempt for readers to realize the importance of due diligence, technical analysis as a precursor of things to come, in a backdrop of good fundamental understanding of fundamentals that drive price discovery. Going it alone in these economic times is dangerous. You need a line item in your budget for investing in market analysis and investing in your personal education is preferred and most beneficial. If your banker disagrees, find a new one. If your current source of information leaves you discouraged, tell them “you’re fired.” If we can help you navigate the unchartered waters we are expected to manage, contact us at   [email protected] or 480-285-4745 or 707-365-0601.

Good Marketing, 
Jerry Gulke

 

Read more analysis from Gulke and listen to audio commentary at AgWeb.com/Gulke

 

Jerry Gulke farms in Illinois and has interests in North Dakota. He is president of Gulke Group Inc., a market advisory firm. Contact him at (707) 365-0601 or GulkeGroup.com. Disclaimer: There is substantial risk of loss in trading futures or options, and each investor and trader must consider whether this is a suitable investment. There is no guarantee the advice we give will result in profitable trades.