The grain/soy complex appears to be closing the book on the winter rally on Monday morning. Fund buying has been the main driving force behind the upmove, but those folks don’t appear to be defending their positions all that aggressively. Technically, it looks like the party is over. Fundamentally, there wasn’t much justification for price strength to begin with. But the so-called index funds are so unpredictable that it’s impossible to say with total confidence that grain and soybean prices are headed lower.
Unexpected weekend rains in Argentina provide a reason for soybean and corn prices to take a tumble. Rainfall totals were heavier than expected and the area of coverage was larger than predicted. There are also indications the pattern is ready to change. Some weather models show the high pressure ridge that has push much of Argentina to the brink of a drought will move off to the east later this week. If so, it will occur just in the nick of time to prevent serious soybean yield loss. Some yield loss may have already occurred in the Argentine corn crop since much of it has already pollinated.
The other big fundamental factor this week will be the release of USDA reports Thursday morning. In addition to a monthly supply/demand update-the final crop estimates for 2005, a quarterly grain stocks report and the winter wheat seedings report will all be issued. Due to disappointing export results, the soybean and perhaps corn usage estimates are likely to be scaled back. There is some talk the crop estimates will also be reduced, but slightly large carryover projections are still a good bet. The grain stocks report will provide insight into domestic usage, which is thought to be very strong in the case of corn thanks to strong growth in ethanol production.
The near-term chart picture for all three of the major markets in the grain/soy complex has gone from bullish to bearish in just a couple sessions. Uptrend line drawn off the late-fall lows were broken on almost every chart either on Friday or Monday. The soybean market has developed a habit of leaving gaps. Wheat is the market that seems intent upon giving four weeks worth of gains back even more rapidly than they were acquired.
Two factors are likely to determine how far prices dive over the next couple weeks: 1) Will the funds that have migrated to the long side take profits or see this as a buying opportunity? 2) How much longer can farmers continue to be tight holders of the very large 2005 corn and soybean crops? If either of these segments of the market has a change in attitude, it could have a dramatic impact on prices because both markets are clearly overpriced based on underlying fundamental factors.
