Grains Oversold

Thursday, February 4, 2010 11:53 AM CST

Trade should continue in a mixed to lower tone, but the grains are oversold and due for a bounce.

Strength will likely find selling interest.

Corn trade was lower this past week due to continued long liquidation and chart selling. The weekly net change was 8 lower on the March contract and December was down 7. The outside influence was negative last week; crude was $1.65 lower, the dollar was 122 higher, and the DOW was 134 lower.

The lower than expected Cattle-on-Feed number seen on the USDA report last Friday also pressured corn last week. The trade has also seen news of disease in China, which may reduce their feed consumption near term. Overall there is limited fresh meaningful supportive news for corn and long liquidation pressure due to margin losses and chart pressure need to be respected over the next few months.

The fundamental picture should be viewed as a supply side bear argument due to the recent USDA supply and demand numbers. Selling interest will continue on bounces until the funds move to a flat position or until significant commercial demand surfaces. On the chart, the trade did move below nearby support at $3.62 which was the bottom of the early October gap; this should promote a test of support at $3.47-50. The market is oversold and due for a bounce, but resistance is up at $3.63 which is the 10-day and then $3.85 which is the 100-day. The weekly export sales were reported at 902,300 tons of old crop, which was toward the upper part of expectations. This could turn into a friendly item if we can sustain this bullish pace.

Soybean trade was lower this past week due to chart pressure and big supply side expectations looking forward into 2010-11. The weekly net changes were 37 lower on the March contract and November was down 22. Meal was down $13 and bean oil was 54 points lower for the week.

The chart continues to look poor after printing new lows for the move last week and fundamental items will likely not change. We have big South American harvest pressure to get through and bigger supply side expectations for the future to deal with as well. There has been some discussion regarding potential rust problems in South America, but most traders estimate that the damage is minimal and will only prevent the current crop estimates from rising.

The weakening spread action has been noted for some of the recent pressure due to fears that it will lead to export cancellations in the coming weeks. The weekly export sales were reported at 673,500 tons of old crop and 183,600 tons of new crop; combined they were at the highs side of expectations. Meal sales were 254,100 tons and oil sales were 46,000 tons; meal sales were within expectations while oil nearly doubled its estimates. Hedgers call with questions, but I believe you still need to consider extending the coverage you want to have in place, otherwise plan on sitting back and waiting for a rally at some point this year due to a new news/weather items.

Wheat trade continued to slip lower this past week due to chart selling and spillover pressure from the row crops. The weekly closes were 24 lower in Chicago, KC was down 15 and Minneapolis was down 12. The news for wheat near-term is light and it should be difficult to see much of any rally as longs continue to liquidate positions. On the chart the March Chicago contract remains below $5, which keeps the chart argument negative. The aggregate trade expectation appears to be looking for a sideways to lower market near term. The market is oversold, but ultimately row crop strength needs to occur to support wheat.

The weekly export sales were reported at 660,700 tons of old crop and new crop sales came in at 28,500 tons. Together, they exceeded expectations. Hedgers call with questions, you still need to consider extending some coverage if you did not before the report, if we do see another downside leg it would make sense to hold for a bounce. The downside chart target right now is the October March Chicago low at $4.60.

Information contained herein is based on what is believed to be the most reliable resources available at the time of publication. Trading commodity futures or options involves risk, and past performance doesn’t indicate future results.

David Fiala is president and chief analyst for FuturesOne, a risk management and futures brokerage firm in Lincoln, Neb. He can be reached at 800-488-5121 or mailto:fiala@futuresone.com.

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