The USDA shocked corn traders once again in their monthly crop report. The USDA lowered yield estimates from 156.4 to 154.4 bushels per acre. Traders were actually expecting an increase in the yield. Production of corn estimates was obviously lowered, but demand was lowered as well. The net result calls for ending stocks to be 122 million bushels lower than last month's estimate. Ending stocks are estimated at 1.837 million bushels, which is still well above this year's ending stocks of 719 million.
The report was a bit of a shocker, but corn prices didn't scream higher today. They had a decent gain of about 11 cents and also posted a technical reversal on the charts. It will be interesting to see if the market can work higher from here and this marks a short-term bottom. The bottom line, however, is that this is still a large crop and ending stocks of 1.837 million bushels is going to pressure prices. Professional traders will be looking for opportunities to sell. The $5.10 area might be a a good area to sell if the market gets there. The one outstanding issue that could support prices is the lack of rain this month in the midwest.
The price of silver dipped to nearly $18 an ounce, before rallying to the current price of just under $20. Silver has dropped more than $30 from the high near $50 a couple years ago and we may be near a strong area of value in this metal.
The cost of production for gold is around $1,200 an ounce and that could set a floor for the precious metals. That number is debatable, but still a good estimate of an all-in cost. Silver has fallen more on a percentage basis than the other metals and it could get the most traction if we have hit a bottom in the complex.
The best way to invest in silver is to buy the silver etf - SLV. I, along with many other investors, also like to buy the physical metal. The best bet is to buy the 1-ounce silver American Eagles produced by the US Mint. There is a but of sticker shock here, as you have to pay about $5 to $6 above the spot price of silver.
It will cost about $25 to $26 a coin on Ebay, which includes shipping. You can find some better offers through some dealers if you buy large quantities, but Ebay is probably your best bet overall.
The grain markets typically move in sync, but the stories are diverging a little for corn and soybeans. Corn continues to falter and is trading below $5 on the December contract. The weather has been fairly tame, expect for a little heat recently. It looks like corn will get through pollination in good shape and we should still see lower prices yet.
The soybean market is holding up better, as supply tightness in the near term is helping the market. The old crop beans are still much stronger than new crop. We've recently seen some minor weather problems for soybeans, but it might be a matter of time before we see lower prices on this market too. Unless the weather is bad enough to cause some major crop losses in soybeans over the next month, supplies will grow and prices will probably fall.
Corn prices bounced early last week, but that was a clear opportunity to sell. Corn is moving into the key pollination phase and there are little weather threats on the horizon.
If corn can make it through pollination in mid-July without any major heat or stress, corn prices are likely to head lower. The chances are solid yields are very high without weather problems and the odds favor lower prices.
We saw a similar setup last year, but the summer brought a major heat wave and the corn crop suffered large losses. If you're a bull, you can't keep hoping for extreme weather to save you. The chances of that happening are getting slimmer each day. Corn may have a hard time trading back above $5 this year if July and August weather is relatively benign.
Crude broke out of the long-term range it has been trading in for nearly a year. The low end of the year is about 85 and the high end is about 98. Those two level have contained oil prices and it has been a simple strategy of buying the low end and selling the high end. Have things changed now that oil has broken above $100?
We have to look at the issue that caused oil to finally break out of the range. Egypt has been quite chaotic in the last week or so as Morsi has been thrown out of power and the military is controlling the country. There is no shortage of conflict, as there are enough people on both sides of the power struggle. As turmoil continues - and protests, riots and deaths escalate, the price of oil will hold a premium.
Now, anyone who has traded oil for a long period of time knows that these premiums can evaporate quickly from the market when the issues are resolved. That could happen at anytime, but the market has had a solid breakout, issues in the Middle East and a strong jobs report to support the market going into the weekend. The momentum is to the upside and may continue, especially if there isn't much profit taking going into the weekend.
A good case can be made that crude oil looks expensive above $100. However, that is usually the case when markets make these types of breakouts. They are often hard trades to make, but they look obvious in hindsight. Right now, traders are covering their shorts and new positions are being taken on the momentum. The technical trade is to look for support areas to get long.
Gold closed below $1,200 today and the sentiment in the market continues to drop. Anyway you slice it, this market wants to go lower.
You could blame it on Bernanke calling an end to the easy money policies, but those talks have been tapered and the stock market has been rallying. Theoretically, gold should rally too. Gold has had many opportunities to rally in recent months to no avail.
Basically, large traders want out. Under conditions like this, a market will trade sideways for a while or have brief rallies on positive news. The large traders pounce on opportunities like this to sell, while the retail traders try to pick bottoms.
Taking a fresh look at this market, I would prefer to buy gold on a clear technical bottom or wait for the price to overshoot the cost of production on the downside. Gold trading around $1,100 to $1,000 would look very attractive to start scaling into a long term buy.
Crude oil prices jumped on Friday on the back of a strong stock market. Crude oil gained $1.40 to close at $96.16. This puts the market in an interesting place, as it once again attempts to test a major resistance area around 98.
The bullish inventory report on Wednesday helped support the rally for the week. It showed a much larger draw than expected, but the overall fundamentals are still looking very negative. Supplies of crude oil are well above their 5 year average and many traders don't feel this should support higher prices.
The dollar index has taken a nose dive this week, which helps support oil prices. Now, the technical setup has the appearance of an inverse head and shoulders pattern. A breakout above the 98 area could signal prices are headed to about 110 -115. That doesn't seem logical at this point, but stranger things have happened.
I would expect a great deal of selling if the market can move to test the upward resistance. A strong break to 100 could send traders scrambling. It will be an interesting market to trade this summer. We should see a rangebound trade between 92 and 98 and that is the way I would want to play the market right now. However, I wouldn't underestimate the power this market could have if there is a technical breakout higher.
Coffee and sugar prices appear to be in a never-ending downward spin. Coffee showed some signs of life earlier this month, but quickly resumed the downtrend. Sugar, however, has been in a slow decent that keeps trickling lower and frustrating bottom-pickers.
This brings us to the important question - how low can prices go? In markets like these, it is difficult to pick the bottoms. The fundamentals do not call for an immediate turnaround, as the weather in Brazil continues to favor large crops and harvesting. China is also a negative for sugar, as their pace of imports has slowed dramatically.
Coffee prices have dropped from $3 to $1.28 in the last two years. Sugar has dropped from 35 cents to 16.65 cents in the last two years. Both markets are entrenched in strong downtrends that don't typically end easily. It will take some type of fundamental change to turn these markets around or they have to overshoot on the downside.
I don't see a major overshoot in either market yet. Supply either needs to drop or demand needs to be stimulated. I think there is huge potential on the demand side for sugar, especially when you consider sugar ethanol production in Brazil. Coffee is still a question mark. There will be some major crop losses for coffee in Central America the next few years due to disease. However, crops in Vietnam and Brazil continue to overwhelm the markets. The market might need to approach the $1 in order to change the fundamental picture.
In markets like these, it is best to wait for a technical turnaround before entering the markets. They can often turn very quickly once the picture becomes clearer to traders. I think we are close to bottoms, but I don't see any entry points right now.
Corn is one of the biggest movers on the day. Corn futures are trading about 15 cents lower after the USDA released their planting progress report on Monday afternoon. Plantings for corn are about 71 percent completed. Farmers closed a huge chunk of the gap in which they were trailing the 5 year average by a huge amount. Now, they are very close to being on average and the emerging crops look like they are in good shape thus far. Corn prices will be facing a strong headwind this season if we have another week of solid plantings.
Gold and silver went down to test the lows on another one of those sharp 4 minute selloffs in Asia. There is overall weakness in the precious metals and I can't say we have hit a major technical bottom yet. I would like to see the weakness play out before jumping in for a longer term play. Long term investors could start to buy in increments lower in the precious metals. The prices are close to the cost of production and there is a chance we could overshoot on the bottom.
Lumber is another interesting market. It had a strong run last year, but prices have fallen about 23 percent since March. That runs counter to the claims that housing is improving and the stock market has been extremely strong. It could be a sign that there might be some underlying problems in demand for the economy or China. Copper prices are also off sharply this year.
Farmers across the Midwest, especially the western part, are hoping the rains will subside for a few weeks. Much of the Midwest has been too wet to plant corn and soybeans so far this season.
The latest crop progress report released on Monday afternoon shows corn and soybeans are far behind their 5-year average. Corn is only 28% planted, compared to 85% for the 5-year average. Soybeans are 6% planted versus 43% for the 5-year average.
Typically, the more delays there are in planting, the lower the yields and total crop size. Farmers can switch corn acres to soy acres if the window for corn closes. That would be somewhat negative for soybeans.
The farmers can make up ground very quickly if the weather clears. They did fairly well for corn in the last week, but they are still well behind. The markets aren't getting too excited so far. That wet weather will have to continue for a couple more weeks to really get traders worried.
For now, the markets are still expecting very large crops for corn and soybeans. I would expect the crops to eventually get in the ground before the window closes and the warm weather could accelerate the growth of the crops. The main test will come in the summer. A lack of drought and extreme heat will probably give us very large crops and put pressure on prices.