The U.S. grain markets are some of the biggest, deepest and most watched markets in the world. While there's always argument over the value of a stock or currency, the laws of supply and demand work to a much greater extent on perishable goods like grains. The limited shelf life and annual production variables combine to provide the grain markets with consistent annual windows of opportunity. This week, we'll be discussing the last of the year's major seasonal trades within the grain markets along with what to expect into the harvest season.
We called June's major grain sell off ahead of the World Agriculture Board's Supply and Demand report based on major commercial selling. You can read the full piece, "COT Report Shows Major Selling Ahead of USDA Reports," for all the details. The grain markets have fallen by 5% in corn, 7% in wheat and 9% in soybeans. The included charts detail the commercial selling and prices received for goods sold. As you'll see, not only did commercial traders call the late summer sell off, they've profited handsomely for their participation.
Moving to the current setup, it appears that the commercial traders have achieved the selling pressure they needed to cover their forward short hedges at a profit while leaving their crops in the ground. This will provide them with some leeway as they begin to tender this year's production. Based on their actions, we expect the recent rounds of commercial purchases to continue supporting the market through harvest.
Not only did the commercial corn traders sell corn near $4.50 on two occasions this year, they've also successfully defended the $3.50 lows. As this is our third trip down to the $3.50 level, I don't necessarily expect it to hold before a rally comes. The typical way this plays out is for one more low to penetrate the technical support that's built up and washout the weak long speculators. Around this time, when the chart looks the worst, we'll see an oversold situation in the market's short-term momentum which will put the market at odds with an increasingly bullish commercial trader net position. A turnaround from this type of low would create our classic Cot Buy Signal.
Moving to soybeans and their increased volatility shows a similar pattern. Commercial traders were heavy buyers on last year's harvest decline purchasing more than 130,000 contracts as the market ground down towards $9 per bushel before screaming higher through the typical October seasonal rally. Last year, fall buying by commercial traders helped push the market nearly $3 per bushel higher in less than five weeks! This is a run of $15,000 per contract in just over one month. We also saw a similar, though less dramatic run beginning in June. This was also fueled by commercial trader purchases which totaled more than 120,000 contracts. Given their current position, their buying could easily fuel another late fall rally.
Finally, closing with the wheat market, the same pattern applies. Commercial end users of wheat clearly believe that $4.60 is a price attractive to their business models. We can see their buying peak at these prices both last September and again this May. Both of these declines were followed by significant rallies. Meanwhile, technical action in wheat, like corn appears negative. Once again, we believe the technical action may push the market lower in the short-term but we expect the support of commercial long hedgers to view this as a baited trap. Therefore, we'll wait for the trap to be sprung while waiting on the sidelines and looking for a place to buy this market.
The grain markets are truly seasonal markets with moves that are clearly identified because they relate to time sensitive periods like planting, development and harvest. Commercial producers, short hedgers sit on their hands through the spring rally as they determine what they expect from this year's crops while commercial long hedgers, the end users wait for the markets to fall far enough to lock in future inputs at profitable prices. These cycles combine to setup the chicken and egg question, "Do the markets rally because of the commercial traders buying or, are the commercial traders driven by the markets' seasonality?" either way, prudent commodity traders will have a front row seat to the grain markets typical October rally.
