Grains continue rally

Ray Grabanski Special to the Farm Forum
Farm Forum

2/20/18 — Grains have continued to rally the past week, with soybeans leading the way pushing up to new resistance areas near $10.40 March futures after breaking above $10.25-30 resistance areas. The other grains have joined soybeans, but in a slower, more steady type rally in both corn and winter wheat futures. HRS wheat futures are still stuck in a downtrend, but that is also slowing recently to a snail’s pace – and in fact is flashing signs of a bottom as well.

Much of the reason for the recent rally has been credited to South American weather. Argentina continues to suffer from mostly warmer and drier weather than normal, and at this point in their growing season is having significant impacts on yield potential. USDA already cut the Argentine production estimates for soybeans (1 mmt in January and 2 mmt in February) and corn (cut 3 mmt in February). With continued adverse weather, it’s likely production numbers will need to be cut again in future reports. So world production estimates of corn and soybeans are going down, not up, as the grain markets are getting just the kind of bullish news that can push prices higher.

South American 14-day weather forecasts are once again a bit drier today in Argentina, with less rainfall coverage over the next seven days than before the weekend. Only the far western sliver of Argentina is expected to get rain now in the next seven days, and most of the rest of the country will be dry and warm. That is boosting soybean prices after the 3 day weekend. Argentina has a bit more precip forecast for the 8-14 day period (vs. the next seven days), making it a more normal to below normal precip forecast. But temps remain above normal for that period, and that continues to support the market as Argentina is likely to have further reductions in their crop size.

Brazil weather is still forecast cool and wet, with normal to above normal precip the next 7 days, and more normal precip in the 8-14 day forecast. Temps will remain below normal for the entire 14 day period, which could provide some harvest difficulties for Brazil, which normally has harvest losses in that rain forest even with normal weather. Not only does wet/cool weather slow harvest and increase harvest losses, but it also delays the planting of second crop corn. That increases the drought risk late in the year, and also is likely to reduce the corn acreage planted as well. So overall, the adverse South American forecast is supportive to soybean prices.

US weather is getting a bit wetter, with above normal precip forecast for the Corn Belt and eastern HRW wheat belt over the next 7 days, but below normal for western HRW wheat and HRS Wheat Belts. The 8-14 day forecast gets wetter, though, with above normal precip forecast for all of the Wheat and Corn Belts. Temps are forecast above normal for the eastern U.S., but below normal for all of the western U.S. for most of the 14 day period. This is an improving forecast for the dry wheat belts, though, and may keep wheat under wraps today and near term if the precip actually falls in dry areas.

The weather is most supportive to soybean prices right now due to the adverse SAM weather forecasts, so soybeans are leading the way higher on the board today. There is resistance again on the March contract at $10.446, and $10.504 from last July. There is weekly resistance from $10.38 to $10.80 in a number of areas ($10.38, $10.39, $10.532, $10.546, $10.732, $10.80). So there is plenty of resistance on the soybean charts in the next 45c. But if SAM weather remains adverse, we may have a chance to push through all of these resistance areas. If we do, that opens up a more wide open chart to a further price rally.

One item we keep forgetting about is in this bull market the influence of a weaker U.S. dollar, which takes time to work its magic to increase exports from the U.S. But the U.S. dollar has been in a steady downtrend since January 6, 2016, when it reached a high of 103.81. A typical downtrend ensued afterwards, with drops and recoveries occurring intermittently — but an overall downtrend emerging with prices dropping to 88.15 on Feb. 16, 2018. In a 2 year period, the dollar has dropped about 15 percent – which means foreign buyers can purchase 15 percent more product for the same price in their currency (on average across all currencies of the world).

Just to give you an idea of the power of the dollar change, the dollar rallied from 79.53 in April 2014 to January 2016, for a gain of over 24 points. And we all know what happened to price from 2014 to 2016 — a stiff downtrend for all commodities. So the magic of a decline in the dollar value should support commodities. So maybe some of the recent strength we are getting is tied to the weakness of the U.S. dollar, which has a positive impact on exports in a lagging fashion. After 2 years of decline, maybe that support is also showing up?