Grains potential bottom harkens back to 2002
In the fourth year of narrowing price ranges, the grain market appears to be bottoming. Indicating an extreme, the average of the one-year futures curves of Bloomberg Grains constituents is near a two-decade low. Despite exceptional Corn Belt growing conditions, trade tension and the sharp decline in the Brazil real, the spot grain index is up about 3% in 2018. Divergent strength is the indication.
Wheat gains have been offset by soybean losses, with corn in the middle this year. Soybeans are at the epicenter of the U.S.-China trade dispute. Driven by politics, massive U.S. stockpiles limit upside. Unchanged from four years ago, and within the narrowest similar-period range in five decades, corn is ripe to be a leader. Upside potential outweighs downside risks, in our view.
Corn potential at the top of grains radar
Corn is ripe to exit its extremely tight range, with upside potential outweighing downside risks. Initial support and resistance near $3.25 and $4.05 a bushel in the front future represent the narrowest 48-month Bollinger Bands since 1964. Typically, when corn is this tightly bound, price appreciation wins out, particularly when it’s trading below the USDA estimated U.S. cost of production.
The halfway mark of the range since 2006 is about $5.70 — initial target resistance. The low near $3 is good support. This year marked the first test of the upper band since 2012. Some normalization in exceptional Corn Belt production should extend the top band higher. More-normal global wheat production this year could be a precursor.
Unsustainable disparity supports soybean futures
Soybean exports from Brazil have become too expensive, supporting U.S.-traded futures. The 28% premium for soybeans at Paranagua, one of the primary Brazilian ports, is the highest in the database since 2006. U.S.-China trade tension creates an unsustainable overhang of supply in the U.S. vs. empty bins in the Southern Hemisphere. Prices have adjusted accordingly, but relatively low-cost U.S. soybeans support exports to the rest of the world, including to China at such a discount.
The average Paranagua premium since 2006 to the front soybean future is 4%. The .BRLSOY$ G Index converts the Paranagua price to U.S. dollar-per-bushel equivalents to match the most widely traded future. The annual correlation is 0.86.
Softs may be forming a longer-term bottom
After significant milestones in October, a foundation could form for a longer-term low in the Bloomberg Softs Spot Subindex. Sugar, coffee and cotton prices bottomed from significant support levels, on the back of record managed-money net shorts as the Brazilian real recovered from a multidecade low vs. the dollar. It’s the kind of situation that is often looked back upon as the indication of a selling extreme.
Ending the month back at its 12-month average, the softs index has plenty of mean-reversion room, particularly if the real-dollar cross has bottomed. It would take about a 34% rally to revisit the 2016 peak. Since 2007, the softs index is 0.72 correlated to the BRLUSD rate, and about the same to coffee prices.