In Part 1 of our blog post we examined potential bottoms forming in sugar and coffee. Now let’s take a look at corn and soybeans – two of America’s most critical crops. Soybeans make up over 60% of all agricultural exports to China. Retaliatory tariffs imposed by China on American agricultural products this past summer impacted soybeans substantially more than other US exports.
We viewed the midsummer decline in soybeans as an opportunity to take a longer-term position in this critical commodity. Our expectation was the trade war with China would quiet down ahead of the mid-term elections in the US. This has not happened. Confident that his rural base will support him despite sharply declining farm income, President Trump has not taken any steps to quiet the trade commotion – at least not yet.
Soybeans and corn are performing surprisingly well considering. Soybean futures are holding midsummer lows despite both the lack of progress on trade and a fairly large harvest this year. Soybeans appear to be forming a solid base for a potential move higher after the harvest happening now.
Data Source: Reuters
As the chart above illustrates, soybeans are oversold and on sale. As we’ve mentioned in previous blog posts, global population and global affluence are expanding, boosting demand and putting pressure on farmers to produce more. One of the reasons beans haven’t declined more – given bumper crops of the past 6 years – is the realization that this market is just one less-than-stellar crop away from a potentially explosive rally. Ditto for corn.
With the negative effects of the Trump trade war fully discounted by the market, we continue to believe they are a screaming buy. RMB Group trading customers without a bullish position in soybeans may want to consider revisiting our blog post from last summer for trade suggestions.
Corn Continues to Hold Long-Term Support
Tariffs and big crops also appear to be fully discounted by corn. Five fabulous growing seasons are reflected in the price action of the chart below. Corn has been on sale for a long time, but that doesn’t mean it will remain so forever. An adverse weather event in the corn-growing regions of North America, South America or China could send this sleepy market skyrocketing higher in a hurry. Our target remains $5.50 in the December 2019 futures contract which is the bottom of the big downward gap created during the bear market of 2013.
Data Source: Reuters
Quiet, sideways price action means longer-dated, close-to-the-money call corn options are bargains. We still like the CBOT December 2019 $4.20 calls trading for less than $1,000 apiece as we write this. They would be worth at least $6,500 if corn hits our $5.50 per bushel target prior to option expiration on November 22, 2019. Holding this call keeps us long through both the Southern and Northern Hemisphere growing seasons. Our maximum risk on this trade is the amount we spend for the call plus transaction costs.
Playing the Range in Gold
One of the first things we noticed about gold as we wrote this blog was how similar its chart is to corn. Like corn, gold has been in a multi-year trading range, oscillating between firm support and solid resistance, unable to make a definitive move in one direction or another.
A number of things happening now lead us to believe gold is getting ready to head back to the top of its elongated trading range. It may test, and possibly, break through resistance at the upper end. Gold has managed two consecutive higher closes above the downtrend line since April, potentially negating a 6-month downtrend in the process. Gold is also showing strength in the face of the recent brutal decline in stocks – something it has been unable to do in quite some time. “Safe money” appears to be finding its way back into the yellow metal.
Data Source: Reuters
Our 12-month price target of $1,450 per ounce is just above the top of gold’s six year trading range; a rally of approximately 15 percent above current levels. We believe the inflationary effects of the Trump tariffs, combined with a rapidly-growing economy and wage pressure from a shrinking workforce, should help keep a floor under gold for the next 12 months.
Like corn, gold’s extended sideways action has reduced expected volatility and led to very reasonably-priced call options. RMB Group trading customers may want to consider a low cost bullish position using the December 2019 gold options traded on the COMEX.
December 2019 $1,400 / $1,450 bull call spreads are currently going for roughly $600. These spreads have the potential to be worth as much as $5,000 should gold hit our $1,450 objective on or prior to option expiration November 25, 2019. We’ll know our timing is early if gold closes twice below old swing lows at $1,184 per ounce.
Please be advised that you need a futures account to trade the markets in this post. The RMB Group has been helping its clientele trade futures and options since 1984 and are very familiar with all kinds of option strategies. Call us toll-free at 800-345-7026 or 312-373-4970 (direct) for more information and/or to open a trading account. Or visit our website at www.rmbgroup.com.
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The RMB Group
222 South Riverside Plaza, Suite 1200, Chicago, IL 60606
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