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March 28, 2006

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Food, Energy and the Future

Name: Lee Gaus

Company: EFG Group

Learn More About Today's Author
Years Trading: 30

Favorite Movie: Hollywood Knights

Food, Energy and the Future

I recently attended an all day meeting in Central Illinois where the major topic discussed was the direction of the grain and oilseed markets. During the course of the day it became clear that the agricultural economists were having a great deal of difficulty in rationalizing the then current price levels of corn and soybeans. The ensuing discussion did highlight areas that I found to be of great interest as they related to crop production, and energy production. The one area I found to be of tremendous significance is in the construction of ethanol plants in the Midwest. According to the information presented there are no fewer than twenty-five new ethanol plants that will go into production in 2006. If this information is accurate several factors are also true. One, some areas of the Midwest that are presently corn surplus areas may well become corn deficit areas in the very near future. Two, the domestic demand for corn will obviously increase as these plants come on line. The ethanol plants of today are no longer the local farmer’s coffee shop pipedream, but are facilities with a capacity of seventy to hundred million gallons a year. Ethanol is also making its mark in Latin America where Brazil is believed to be cutting back Coffee production, increasing Sugar production and using the Sugar to produce ethanol. Couple the ethanol revolution in the U.S. and Brazil with the growing interest in bio-diesel production and we could experience a major shift over time in the demand and usage of both beans and corn. While the major impact of ethanol will be in the future I thought it would be a good idea to examine the grain and oil seed and Sugar markets.

OATS: Oats? Why would I start with oats? There is an old saying in the business “Oats knows”. So lets us start with an examination of the Oat market. All three of my indicators (short, medium, and long term) were in a protracted up trend until the short and medium term indicators turned lower on the week ending March 9, (my short and medium term week always ends on a Thursday close). This was followed by the long term indicator turning bearish on the week ending March 17 (my long term week always ends on Friday). The short and medium term reversals were followed by a violation of the huge “M” formation which started on or about 11/18/05, and was violated on 3/15/06.

I think May Oats will attempt to rally sometime around the end of the March, but in my opinion the Oat market will have difficulty reversing to a long term bullish trend at least through April, and possibly longer. In my view good long term support for the Oat market is in the $1.55 to $1.60 level. Once the Oat market finds the point of price equilibrium do not be surprised if it goes into a long term choppy market.

CORN: As of this writing my long term and mid term indicator in corn are still in an uptrend. But the short term indicator turned lower on the week ending March 16 (remember my short term week ends on Thursday). Interesting that the short term indicator in Oats turned a week earlier, maybe Oats do know. I expect the short term indicator to turn negative in the next week. The long term indicator may be able to hang on for another two or three weeks, but without some unexpected fundamental news it is my opinion that it is just a matter of time before my long term indicator turns bearish.

I think May Corn like May Oats will attempt to rally sometime around the end of March, but in my opinion the Corn market will have difficulty reversing to a long term bullish trend until mid-April when we have a better idea of planting progress and intentions. In my view good long term support for the Corn market is in the $1.95 to $2.00 level. Once the Corn market finds the point of price equilibrium the direction from there in my view will be determined by the weather.

Taking a look at the corn numbers we see that carry-over from last crop year is pegged at by the USDA 2.35 billion bushels. Projected acreage for 2006 is in the 80.4 range, but do not be surprised if it comes in around 80.2 with some corn acreage in Minnesota and South Dakota being switched to beans. Trend line yield appears to be in the 148 bushels per acre area, and we are projecting total usage to be in the 11.35 billion area giving us a projected carry out in the 1.8 billion bushel area. I find it interesting, that usage for ethanol increases from 1.6 billion bushels for crop year 2005 and is projected to 2.040 billion in crop year 2006. So what does this all mean? I look for corn to trade between a low range of 2.05 to 2.25 and a high range between 2.80 and 2.90 if there is no weather impact.

SOYBEANS: As of this writing my long term indicator in corn is still in an uptrend, barely. But the short term and mid term indicators turned lower on the week ending March 16 (remember my short term week ends on Thursday). Interesting that the short term indicator in Soybeans like Corn turned a week later than Oats, I am starting to believe maybe Oats do know. I am projecting my long term indicator for Soybeans to turn bearish in the next week.

I think May Beans like May Oats and Corn will attempt to rally sometime around the end of the March, but in my opinion like Corn and Oats, Soybeans will have difficulty reversing to a long term bullish trend at until mid-April when we have a better idea of actual planting intentions. Once the Bean market finds the point of price equilibrium the direction in my view will be determined by the weather. Near term support for Soybeans in my view comes in around $5.50, with long term support around the $4.80 to $5.00 level.

SUGAR: In my view Sugar was one of the early leaders of the rally we experienced going back to early in 2005. I believe the power behind the Sugar rally was related to a book that was released during 2005 that pointed out the increased usage of Sugar in the manufacturing of ethanol in Brazil. During that period of time we witnessed Sugar rally over 1300 points making a weekly high during the week of January 30, 2006. My short term, and mid term indicators have since turned down, while my long term indicator remains friendly.

Unlike the grains I am not nearly as convinced that my long term trend in Sugar will turn lower. If indeed Sugar does turn long term bearish my best guess is I will not have that confirmation for another three weeks. I am looking for a potential rally in Sugar until about April 10. If that indeed happens, and there is no promise that it will, I would expect my short and mid term indicators to turn higher.

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