The death of commodities was one of the big memes of 2013. Fears of slowdowns in China and the emerging markets caused investors to abandon nearly the entire sector. America was gifted with burgeoning energy supplies courtesy of hydraulic fracturing as well as bumper crops of wheat corn and soybeans which put further pressure on nearly everything. About the only commodity sector that didn’t get hit in 2013 were the meats. Oil, grains, soft commodities and metals all fell and, in many cases, fell hard.
We are barely 2 months into the new year and commodities have made a 180 degree turnaround. Crude is solidly above $100. Coffee has soared from a low of $113.50 to a high of $178.00 – a gain of 56.8% in just one month. Natural gas exploded this winter, rallying nearly as much as coffee percentage-wise. Sugar has jumped 18.2% just since the beginning of February.
The common denominator in all of these markets is the weather…
The “Polar Vortex” has dominated the Eastern half of the US for the entire winter and continues to wreak havoc as we write this. Energy prices skyrocketed as wave after wave of cold air assaulted the most populated sections of the North American continent. In South America the culprit is dryness. Lack of rain in key coffee and sugar-growing regions of Brazil obliterated long-standing bear markets in both of these commodities.
Will the Grains Rally Next?
The only sector that hasn’t really participated in 2014’s big commodity turnaround has been the grains but that could be changing. Big basing formations in corn, wheat and soybeans appear to be setting the stage for significant rallies in all three of these key commodities as well. With South American harvest season upon us and North American planting season just around the corner, it won’t take much disruptive weather to get the animal spirits stirring in these markets as well.
One potential scenario? Flooding. Many portions of the American Midwest have received record snowfall this winter. All that snow is going to eventually melt. China will also remain important. The world’s most populous country may be enduring an economic slowdown – “slowdown” in China being defined by a growth rate of 7% – but it is also facing a potentially much bigger problem – the loss of productive farmland due to changing weather patterns and pollution. The Chinese Ministry of Land and Resources estimates that up to 2.5% of China’s arable land is too polluted to farm. Other large sections of land have been hammered by drought. The Chinese are losing cropland and by virtue of their newfound prosperity, increasing their demand for grain.
The Chinese are not going to give up their newfound Western consumption habits – slowdown or no slowdown. With the world just one year away from the historically low stockpiles of corn and soybeans that caused the prices of both commodities to spike sharply the past two summers, we believe that just the potential for less-than-stellar crops in either North of South America could send prices soaring northward once again.
We are going to focus on corn in the “Alert” because three months of sideways, basing activity has removed a lot of volatility premium from prices, making plays in corn less costly on a relative basis than wheat and soybeans. However we will be monitoring wheat and soybeans closely over the next few weeks and will recommend bullish positions in both should market conditions cooperate and give us reasonably-priced entry opportunities.
Three Technical Reasons to Buy Corn Now
The chart above is giving us three solid reasons to buy corn:
1) It negated its late-2013 downtrend in December of 2013
2) The 20-day moving average crossed over the 40-day moving average earlier this month.
3) Prices are testing and holding the upper end of corn’s three-month trading range.
Our first upside objective is a retracement of the bear move back to $5.30 in the July contract. Our second objective is a Fibonacci extension to $6.00 in the July contract. Right now we are looking at a July call option play with a cost of roughly $750 plus transaction cost.
This option will be worth at least $2,500 should corn hit our first objective of $5.30 prior to expiration on June 20, 2014 and as much as $6,000 at our second objective of $6.00. RMB Group trading customers interested in this strategy should contact their brokers for a specific recommendation. We can also custom-design similar positions with lower costs and risks.
If you are not an RMB Trading Customer, give us a call at 800-345-7026 (toll free) or 312-373-4970 (direct) and we’d be happy to go over this strategy with you. Contact us to learn more about this trade or e-mail firstname.lastname@example.org. Put the word “corn” in the subject line and we will contact you about this idea.