What are you paying for gasoline, what would you pay for bread? In today’s world you pay unheard of prices for energy, but at the same time prices for food is relatively still a bargain. There are markets such as Electronics that are unique in the marketplace because it is always selling “a more and better product” for less price as time goes on. What is price and what is “worth”? From a traders perspective “price” is just a measurement, from a sellers (producer/distributor) view it is compensation, from a buyers (consumer/commercial) view it is the cost to obtain goods or services. From a traders view “worth” is the last trade price, to the seller it is what the buyer is willing to pay, and to the buyer it is based on their needs, wants, and financial condition.
In the case of wheat, other grains, and food, you could compare the price of what it cost now to what the price was in the past (as so many other things) and if nothing else is human nature. It does not change what the price is now, and it is merely a reference. As a producer, commercial, trader, or speculator, the question is where is this market going, and if higher, how high can the price get. There are two types of rallies (bull markets) in the agricultural markets; one is a supply side (when inventories are low) and the more powerful, demand. When both conditions exist, the potential for new all time highs is in place. Demand, just the meaning of the word in any of its forms speaks for itself. In economics it means the desire to purchase, coupled with the power to do so. Also, demand is the quantity of goods that buyers will take at a particular price.
The wheat market looks like the crude oil market, going through $50 for the first time on the way to $78, back to $50 and now above $80 making new all time highs. No matter how high the wheat goes, in some point in the future, it will start a downtrend and find support and then another uptrend to retest the old highs and eventually make new all time highs. How do they compare? Because when gasoline went to $3 a gallon for the first time, it was all over the news everywhere for a long time and now closer to $4 and it is old news. Why? Because when people need or want something and they have the money, they will pay no matter what, if they do not have money, then choices need to be made, and when price gets too high, people stop buying, demand is less resulting in more supply than thought, and lower prices follow.
Prices over the longer time frames have a tendency to go up, “when I was young $10 could buy a ....” but markets like gold as an example, recently traded at levels not seen in 26 years. Much has to do with currency values. When gold was trading at their all time highs, the US dollar was king, and now with the value of the dollar at 15 year lows, gold at $740 US dollars is cheaper, not like $740 gold back then. When gold or anything quoted in US dollars remains the same but a foreign country currency goes up against the dollar, the same in US dollars becomes cheaper to that other country.
Wheat, grains, or anything quoted in US dollars will become cheaper to other countries if their currency gets stronger against the dollar.
The main factors that drive the grain market; demand, supply, and future production. Many factors make each of those three fundamentals. There is only so much land in the US for row crops, the South American factor will be the controlling factor for the world needs because of their ability to plant unused land. One factor always unknown and that no creature on earth can control, is the weather, and this is a futures market that is driven by weather. Serious widespread droughts in the USA tend to follow a 19-year cycle (the longest has been 23 years), the last in 1988 makes 2007, 19 years. If we get past the next four years without a widespread drought, we will have broken a very long record. What would the price be for wheat if there was a major shortfall in production for a year or two? Since there is only so much land for row crops in the USA, not only do the soybeans and corn compete for vast amounts of land, but wheat and non feed grains such as cotton compete too. This is done through prices. The preview for this “how high can it go” will be seen in every month we trade from now on, until production outstrips demand and stockpiles abound. This is not unique to the grains, but other commodities as well. The American farmer looks like he is bringing in another record corn crop and Dec.07 corn is trading $3.75, can you believe that? Not if you traded corn 30 or even 10 years ago, only until recently did corn become energy, and now you can. What if Mother Nature did not cooperate? The US government has legislation for ethanol production that will draw acres away from wheat to corn and a bidding war that is already here between the switch able crops for land. Supply and demand for land in a bull market let alone the supply and demand for the actual grain.
The Administration Has Sent Congress Legislative Proposals To Achieve "Twenty In Ten" With Two Steps:
- Increasing The Supply Of Renewable And Other Alternative Fuels By Setting A Mandatory Fuels Standard To Require The Equivalent Of 35 Billion Gallons Of Renewable And Other Alternative Fuels In 2017 – Nearly Five Times The 2012 Target Now In Law. (In 2017, this will displace 15 percent of projected annual gasoline use)
Where is the corn coming from to comply with these laws if passed?
Even with the facts of adequate stockpiles of most commodities lately, the markets are not as comfortable with the supplies for food or energy, even when in the past these stocks would be viewed as burdensome.
GOING FORWARD FROM HERE, it looks like we are in a long term bull market for Wheat, Soybeans, Corn, in that order, not to be ending anytime soon. Wheat is the leader until the fate of Australia is further known. The charts look like $.80 cent weekly trading ranges in the wheat and soybeans for the next few months. With the above proposed legislation, corn could go to $6.00 in the next year or two. If South America has a hint of a problem with the beans this crop, soybeans should make new all time highs, and everything is set in place for continued new all time highs in all the grains.
The Thirst for Crude Oil Will Not Quench the Hunger for Food!
Gas or food or can you afford both? When you look back thirty years ago, you did not have the world economies or their population growing like it is today, and the what is the first thing that people buy with money they never had before? They buy oilseeds and food products. In today’s world, these same economies that had a hard time providing food are now fighting for roads to drive their cars on. Food is a luxury that more of the world is now able to afford. Do you think when they drive up to their McDonalds; they take a pass on the hamburger because the price of the bun made the cost rise 6 cents? Yes, places like Russia are opening up their grain reserves to quell the uproar by the people over the bread prices, and at the same time countries are making it easier to import but harder to export. It feels like the world is just starting to change their view about food going forward, the way they now look at crude oil (black gold). Yes, these same countries have poverty by the hundreds of millions, but with the trickle down effect, looking at the autos, high rises, and wealth exploding; millions more can afford the luxury and pleasure of being able to buy food.
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| Wheat nearest monthly continuation chart. |
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| Soybean nearest monthly continuation chart. |
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| Corn nearest weekly continuation chart. |
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| As the production of ethanol rises, the stocks to usage go down. |
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Nearest month High Prices
Soybeans Corn Wheat
7/73 10.95
10/74 9.50 10/74 4.00 2/74 5.85
4/77 10.77
6/80 10.50 12/80 3.90 1/81 5.45
11/80 9.30 4/81 3.90
11/83 9.70 8/83 3.75
6/88 10.88 7/88 3.70
7/96 3.90 4/96 6.35
4/04 10.64 4/04 3.35
10/04 5.45 6/07 4.30 6/07 6.50+
9/07 10.17 1/2 9/07 9.61 3/4
It should be noted that these prices are within cents of the real highs for the moves based on the nearest futures month traded. Also, in 4/04 after reaching near record highs of $10.88, 6 months later in 10/04 the prices plunged down to $5.06.
As you can see, looking at the past will give you less clues to where the market is going because many of the factors have changed in these markets. As discussed earlier, grain futures are now energy futures, and the expanding world economies are giving buying power to people who once could not afford the basics, and now are upgrading their caliber of food. The demand now is much greater and looks like the grains will be in a bull market for the next year or longer depending on the factors we discussed. Demand will get larger because more buyers want the product, and countries are moving to stockpile, a bullish scenario.
The past shows that these markets will be volatile and have ranges per month that were traded in a yearly period many times in the past. The grain markets have time and again after making new highs could not sustain the high prices, and fell below $5 in beans, and $2 in corn. Wheat gained $3 in the last 3 months, which was more than the $3 it sold for years.
Grains will trade on perception, and the many ongoing weather concerns, and can flip flop those thoughts many times in a short period of time during the growing seasons.
Basically, my outlook is to trade from the long side for quite some time, have a plan to trade the market in a manner that you can tolerate $1 and $2 corrections, know that this is a trading market and on the way up it will be painful to be short unless you really have the product to sell. Margin is NOT a money management tool in this market. Remember $1 is a $5000 move on 1 CBOT contract. If you have a $25,000 account, you can lose 20% of your account in two days with 1 contract of soybeans. They do trade mini contracts at the CBOT that are 1/5th the size and maybe more suitable for smaller accounts.
Good for the Farmer, Good for America! (OR)
The Farmer Finally Has Seen The Day of Light! (you can pick)
Howard Tyllas
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