Commodities

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.

Crude oil lost about $2.50 on Wednesday, as a series of negative news items had traders running for the exits.  The market was technically setup for a large move after an inside day was formed on Tuesday.  An "inside day" refers to the market trading within the previous day's range.  The following day is typically a powerful breakout in either direction.

The negative news started last night when China released weak economic news.  The market was also looking forward to the Fed comments.  Probably the biggest news came from the weekly oil inventory numbers.  They showed a record amount of supplies on hand.  Crude oil making a run at $100 again in light 0f the supply numbers might not be warranted.

The market trended lower all day.  Support was found just above $90, which is the 50 percent retracement of the rally from the last couple weeks.  Crude oil closed right at $91 on the day.

It might be difficult for oil to rally much higher in the next couple months.  Traders are worried about the large amount of supplies and the stock market is looking fairly lofty.  Stocks have a tendency to rally the day after a Fed report. If that doesn't happen, we could see overall weakness in stocks and oil in the near term.  The term "Sell in May and go away" is on the minds of traders.

Gold prices are in the midst of a complete meltdown.  Gold traded about $144 lower on Monday, which is on the back of a large selloff late last week.  Gold is now trading at $1,356 an ounce, down 9 percent on the day. Silver prices were in even worse shape. They lost about 11 percent on the day, ending at $23.36 an ounce.

There has been a lot of talk on why prices are down.  The main one centers on the fear that Cyprus will be forced to sell a great deal of their gold holdings and many other struggling European countries may be forced to do the same. Goldman Sachs also recently came out with a bearish call on gold.

Regardless of the catalyst, gold broke major technical support and the market is in severe liquidation mode.  Market moves like this tend to be exaggerated and it is likely there will be an overshoot to the downside.  I don't like to sound like one of the perpetual gold bulls, but I believe the market will move higher in the long run and much of this is panic technical selling.  Many investors and institutions have to liquidate for margin reasons and gold funds like GLD have to liquidate their physical gold positions.

The main thing I look at is the cost of production for gold.  I have seen many figures thrown around, but an average cost of production around the world is about $1,300.  The large miners are a couple hundred dollars below that figure, but this is an average cost.  When commodities break below their cost of production, a low in price is not far behind.  Buying gold near or below $1,300 looks very attractive.

I like buying the ETF (GLD) for a long term trade.  You could get washed out if you trade futures in this environment and trying to pick a bottom.  It is amazing to think that the cost of production has gone from about $300 when the rally began around the turn of the century to where it is now.  The same can be said for corn and soybeans.  I remember around the same timeframe that farmers could turn a profit with corn in the low 2's.  Now, they would be far underwater.  Who says there isn't any inflation?

Natural gas has finally gotten the feel of a bull market.  This has been in the making for several years as gas prices have drifted lower into the abyss year after year.

By now, we all know the long term outlook is very positive for natural gas and it makes sense that prices will eventually moves higher.  The problem has been the over burden of excess supplies.

Coming into this winter, most analysts were doubtful that much of a chunk of the excess supplies would be taken out of the market.  However, the winter was colder than normal and supplies have finally fallen below the 5-year average.

At the very least, I think the tables have turned and we are now in the early stages of a long term bull market.  I'm sure we will see some sharp setbacks along the way, but a floor in prices has been established.  Natural gas makes sense on so many levels and it will be difficult for demand to not increase in the long run.

It would actually be better if prices didn't move much above $4 for the next couple years.  This would provide for long-term planning for natural gas usage that would solidify higher prices 10 years from now.

As the winter comes to an end, natural gas will key on cooling demand as temperatures climb.  The focus will also be on production and long term commitments for shipping natural gas abroad.  The U.S. has by far a much lower cost for natural gas than other countries.  It makes economic sense for us to ship liquified natural gas to these countries and everyone benefits.  I think it is only a matter of time before this happens, along with many other industries further adopting natural gas usage.

This probably isn't a market to chase higher.  It could reverse from $4 at anytime.  The $4.50 level is also a major level of resistance.  Patience might be the key for long term investors.

If you haven't looked at the latest in technology in the commodities trading arena, it is certainly worth investigating.  Many companies and brokers are making great strides in their trading platforms, as well as mobile applications.

Trading commodities through your smartphones is available and it will certainly become more popular in the future.  I don't recommend trying to actively trade everyday from your smartphone, but is does offer convenience.  They will probably evolve into becomming a point where more and more commodity trades are placed in the future.

Corn soybeans and wheat had a rough day today.  Farmers weren't too happy about the sharp reversal in the futures prices, as they look to price their grains for the upcoming season.

Corn dropped the limit of 40 cents on the day, with many unfilled orders left at the close.  Soybeans and wheat dropped almost 50 cents each.

There were two major reports released today from the USDA.  The first was the Planting Intentions report.  This shows the total amount of acres the USDA expects farmers to plant this season for each crop.  The numbers came in fairly close to the estimates.  The soybean number was a little lower than expected.  This offered some support to new crop beans.

The quarterly grain stocks report is the one that rattled the markets.  Inventories were much higher than expected across the board.  This shows that usage is lagging behind expectations.  Supplies have been tight coming into this season.  Now, there are worries that supply isn't as tight and the U.S. will plant a large number of acres.  With good weather, prices could have a long way to go on the downside.

We said the same thing last year, but the weather caused some major problems.  That is still a possibility this year.  However, it is not a stretch to think the highs could be in for the markets even before the season starts.

Crude oil futures managed some decent gains today even though the stock market turn negative and the dollar traded higher.

Crude oil is trading just shy of $95, although the market traded well above that earlier in the day.  Oil looks like it wants to go higher and many traders are still talking about $100 oil in the near future.  It could conceivably get there if the financial markets don't unravel.

There is plenty of supply of crude oil and a good argument can be made that oil prices probably shouldn't move higher.  However, we have been in this situation numerous times over the last couple years. The backstop of the Fed is supporting oil prices and many of the large investment houses are calling for an improving global economy.

Crude oil is right in the middle of its trading range and this usually isn't a good place to initiate long or short positions.  The momentum is to the upside right now and that is probably the side to play until things change.

This is an update on where the futures industry stands, as there is still a great deal of concern on whether another PFG Best fallout can happen.  Many account holders at PFG lost a considerable amount of money.  Most investors thus far only recovered about 30 to 50 percent of their money.

People will commit fraud and we have had no shortage of these cases in the investment world in the last ten years.  However, much of the blame is centered on the industry regulators.  They are feeling a great deal of heat and swift changes need to be made.

There have been some important studies done on the industry; particularly in the PFG case.  The NFA and CFTC have also been consulting with industry leaders on how they can improve rules and enforcement.  There are many suggestions on the table and it looks like things will improve for the better.

The main issue is that customer seggregated funds will be verified by the NFA.  It will be nearly impossible to thwart these regulations.  Other policies will be implemented to also strengthen regulations and investor money should be extremely safe when held at a commodity brokerage firm.

Natural gas prices have been moving higher than many analysts expected, but it looks like the market still wants to go higher.  Often when a commodity market keeps moving higher and it somewhat defies logic, it means that there is something more meaningful behind the rally.  Thus, prices can keep going higher.

The main thing that drives a market like this is that the current fundamentals look fairly weak.  That causes more traders to jump in and short the market, as they believe it is over valued.  As the price moves higher, the short traders have to cover their short positions and this extra buying drives the market higher.

Natural gas is benefitting from a fairly cold winter and the recent forecast calls for more below normal temps.  The $4 level could be a major hurdle for this market.  The market is currently trading around 3.95, so it is within striking distance.

The long term fundamentals look great for natural gas, but the price looks a little extended with the current fundamentals.  Supplies are still very high, but they have been drawn down quite a bit this winter.  They will start to rebuild shortly during the injection season.  Natural gas is known for sharp corrections and it could be prone to one at any time.  For now, the trade is to follow the trend higher, but protect yourself in case the market reverses sharply.

Sugar futures could be one of the better value plays in commodities at this time.  That is especially true when the price gets near the 18 cent level.  This has proven to be a major support level for sugar technically and fundamentally as well.

It seems like the world wants to buy sugar whenever prices touch 18 cents.  Cheaper sugar also creates more demand for sugar ethanol in Brazil.  They are better off turning the raw sugarcane into ethanol than processing it into sugar.  Brazil also increased the percent of ethanol used in fuel and they raised the prices of gasoline in their country.  These factors will help increase demand for sugar ethanol into the future.

Sugar prices have been weighed down by a large sugar crop in Brazil, but demand should be there to limit and major build in world inventories.  It looks like we found a major value area for sugar around 18 cents.  There appears to be much more upside potential in this market than downside risk for the long term.