Friday Morning, the USDA came out with Quarterly grain stocks and the annual prospective planting report. This report revealed what supplies we have left over from the 2011 harvest and which product farmers expect to plant in addition to how many acres will be devoted to these crops.
It was very bullish for nearby grain contracts: Right after the open the front month contracts for Corn was up 36 cents, Beans were up 52 cents and Wheat up 30 cents.
Bottom line: There was less than expected corn in storage but farmers intend to plant more acreage. There is lower then expected storage in beans and they expect to plant less acres.
That is why the nearby front month contracts were up in the markets, and why the new crop months were sharply higher in Beans and less so in Corn. Due to increased global demand for both feedstock and energy, corn which is used in ethanol, is literally not just a cash crop, but a hot commodity, and one of the many reasons why farmers plan to plant more acreage this year.
So what are the prospects for corn prices?
Is this a one day rally or can we see an extended gain?
To answer these question lets turn to my favorite analytical tools. First I like to look at the seasonal analysis, in the Commodity Traders Almanac (pages 158-160) we see that Corn prices have a strong seasonal tendency to move higher in April. Since 1970 during the month of April, corn prices have moved up from March’s closing price 25 times verses down 17 or 69.9% of the time. The average gain is 1.7%. The best percentage gain was in 1987 with a 13.4% month over month gain, the worst performing year was back in 1992 with a 5.6% loss.
As this article was prepared before the Close on March 30th, the last price for the May Futures contract was 644, the maximum daily trading limit. Assuming this is the closing price for the month, by historic standards (1970 to the present) if we have an average monthly gain in April of 1.7% that puts May Corn futures at 655. If we use the historic high or 13.4% then that targets Corn prices closer to 730 per bushel.
Now let’s examine the technical picture. The Persons monthly pivots target the April high for the May contract at 678.75. That actually represents a 5.5% gain. Well within the normal to upper percent gains from a historic standard. The On Balance Volume indicator reflects substantial selling pressure in corn from the peak in early March. Therefore I would expect any test of that level to be met with more selling pressure. In the bottom quadrant of the chart we have a graphical layout of the CFTC Commitment of Traders Report, that reveals the Small speculators are net short, the commercials are net short and the large speculators (Hedge Funds) are the ones net Long. So far they are right, but since they are in the game for performance on equity and not taking delivery, I suspect they will look to take a profit at some time. Therefore I would be looking to buy dips, if one occurs in early April, but I will be looking to sell closer to the 675- 725 range basis the July contract towards months end.
I am not sure if many traders are aware of this twist but due to incredible warm / dry winter, many ag-experts are predicting an upturn in pest population as larval stage of pests may have survived. Therefore farmers might be buying more GMO seed and more pesticide than they will fertilizer this growing season. As outlined above, according to the USDA, farmers intend to plant more corn; usually it increases the need for potassium chloride (potash). The crops for which potash is in high demand include: fruits and vegetables (18 percent of total demand), wheat (16 percent), corn (12 percent), and rice (12 percent). In addition, to this quarterly report, as a direct result of warmer and dryer weather, some farmers intend on planting corn earlier and may have trimmed their fertilizer consumption to cut costs. That means fertilizer stocks which can still move higher, might not outpace the sales of chemical pesticide and GMO seed.
With that said, I want to watch these chemical/ seed stocks for a stronger seasonal move up:
Syngenta (SYT) – very light option volume
Dow Chemical (DOW) – moderate option volume
Monsanto (MON) – moderate option volume
These are Fertilizer stocks to watch that might have a further but limited upside:
Agrium (AGU) – very light option volume
Potash (POT) – moderate to higher option volume
Intrepid Potash (IPI) – light option volume
Mosaic (MOS) – light option volume
Terra Nitrogen (TNH) – no options
All the best,
Disclosure: I have no positions on in these securities as of 3-30-2012.