CHICAGO — DTN’s top analyst sees worrying developments in grain markets.
Darin Newsom said a stable U.S. dollar is bad news because it makes it harder to attract investment dollars into agricultural commodities.
The Dow Jones Industrial Average is firming and building some bullish momentum, which could pull money out of commodities and into stocks.
And the Continuous Commodity Index is showing continued liquidation in non-commercial positions. That means speculators are putting their money elsewhere.
“This bothers me, this type of pattern combined with what we see in the Dow and what we see in the dollar,” Newsom told farmers attending DTN’s Ag Summit.
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It is an important dynamic because Newsom is convinced that outside investors will play a major role in what happens to grain markets in 2012.
He gave farmers his best guess where corn, soybean and wheat markets may be heading based on his analysis of various indicators.
The corn market is about where it should be based on the five-year seasonal index. But if prices stay depressed much longer, that will be another worrisome development because it means corn is deviating from its trend.
Non-commercial investors have been getting out of the corn market since February. It reminds Newsom of 2008, which means it could be another year before investors become interested in the commodity again.
He thinks the March contract for corn will drop to about $5.50 per bushel in late January or early February due to the lack of investor interest and markets growing more comfortable with supplies.
However, Newsom thinks the corn market will rebound in the summer, rallying to $6.75 or even $7 per bushel due to continued strong global demand for the commodity and investors eventually coming to the realization it is still the second tightest U.S. supply on record.
Investors have exited the soy market in droves. Non-commercial traders are holding only 11,000 contracts of the commodity in early December.
“It’s the smallest net-long futures position in the soybean market in about a year-and-a-half,” said Newsom.
“At some point you would think this group is going to get interested in soybeans.”
But the global supply and demand situation for soybeans is more bearish than it is for corn.
“This is going to make it very difficult for soybeans to rally. The only reason why soybeans might rally is to keep up with corn,” he said.
He expects the nearby soybean futures contract to fall to about $10.70 per bu. this winter and then rebound to about $14.50 to $14.60 by August as the crop follows its normal seasonal pattern. But soybeans will have a tough time eclipsing that level.
“There is just no real fire underneath this market,” said Newsom.
“With the type of production that is possible in South America this year this might get more bearish.”
There is even less fire in wheat markets. The only thing that might save wheat is that non-commercial investors have sold way more contract than they have purchased. They were 52,000 contracts short in wheat.
At some point that has to change, which could lead to a $1 per bu. rally in the wheat market.
“If I was going to take a fly on something I’d probably look at wheat. What possible reason does it have to go down anymore?”
But the outlook is incredibly bearish on the commercial side of the market, where buyers are giving growers the straight-arm.
“The commercial side says, ‘We don’t want your wheat now, we don’t want it 60 days from now, we don’t need it 90 days from now. You can hold it as long as it stays good in the bin.’”
The world stocks-to-use ratio in wheat is a price-depressing 30 percent compared to less than half that amount for corn.
“So almost one-third of all the demand that is projected we will still have in ending stocks. It’s an incredibly bearish situation,” said Newsom.
Getting to $6.70 per bu. could be a tough slog given that bloated supply.
