Newsom on the Market

By Darin Newsom
DTN Senior Analyst

Tucked away behind the Marriott at the Convention Center in downtown New Orleans, and across a quiet section of Fulton Street, is the relatively new restaurant Rebirth. My last night in town for the recent Commodity Classic, some colleagues and I went for dinner at this small place, and the meal was extraordinary. Conversation with the staff provided us a brief history of the restaurant, as well as its unique name. Regarding the latter, the owner and chef envisioned a new take, a rebirth, on classic Cajun Creole cuisine. They succeeded.

To me, being a romantic and all, the name stood for so much more. One of my first assignments at DTN back in 2004 was to cover as a reporter (yes, really) the annual National Grain and Feed Association convention held that year in New Orleans. That time I also stayed across the street from the Convention Center in a hotel that no longer exists. Today a memorial park stands in its place, the hotel washed away by Hurricane Katrina in 2005. So when I see a little restaurant named Rebirth succeeding in an old warehouse district of New Orleans, I think of how that part of the city has come back from the catastrophe that could have destroyed it forever.

Now, think about the commodity sector in general. It has spent almost four years in a death-spiral resulting in economic hardships for the key components of gold mining, oil production, and the corn industry. In other words, the Three Kings of Commodities had nothing but tarnished crowns. But as I wrote about in this column back on January 29 (Two-and-a Half Kings), from a technical (chart-based) perspective, gold and crude oil had established signals indicating their major (long-term) downtrends had come to an end, replaced by long-term uptrends. A week ago, in my Technically Speaking blog on DTN, I discussed how the S&P Goldman Sachs Commodity Index was also growing more bullish after its own signals of a major turn at the end of January.

What about the grain sector, though? With less than a week left in March, two of the three main U.S. markets are on the threshold of creating long-term bullish patterns on their respective monthly charts, while the third remains tentative.

Probably the most impressive mover in March has been soybeans. Earlier this month the then more-active and now nearby May contract took out the February low of $8.59 1/2, yet held above its recently established major low of $8.44 1/4 (November 2015), before rallying above the February high of $8.89 1/2. Similarly, the DTN National Soybean Index (NSI.X, national average cash price, the intrinsic value of the market) traded outside its February range while setting a new major low near $8.05 (March 1). If the NSI.X were to close higher for the month (it finished February calculated near $8.06 1/4) it would establish a key bullish reversal. As the name implies, this is usually important.

Fundamentalists will be quick to point out that there is absolutely no way the soybean market can be turning bullish, not with Brazilian soybean production estimates climbing north of 101 million metric tons. Add to that the most recent USDA weekly Export Sales and Shipments report showed total sales for the 2015-2016 marketing year at 1.610 billion bushels, roughly 90% of last marketing year's 1.780 bb for the same week. In its March round of monthly Supply and Demand reports USDA held to its demand projection of 1.690 bb, or 92% of last year's 1.843 bb. In other words we are past the halfway point of the marketing year, the most recent report was for week 29, and sales remain 2% behind pace.

Furthermore, there is this little thing called USDA's Quarterly Stocks and Prospective Plantings reports set to be unleashed on the market this coming Thursday, March 31. No matter what method one uses -- even some bullish -- second quarter stocks-on-hand of soybeans should be the largest since 2006-2007, possibly near the 1.5 bb mark. As for prospective plantings, there is roughly a 50-50 chance USDA sticks with the slight decrease it released at its Annual Outlook Forum in February. The flip side of that coin is soybean acreage estimates increase due to the recent strength of the November soybean futures contract versus December corn futures, and possibly early concerns over continued wet conditions over parts of the U.S. Midwest.

On the other hand, a story released this week talked of China's imports increasing to 84.5 mmt in the 2016-2017 marketing year, 3% larger than the latest projection of 82 mmt for 2015-2016. And if the U.S. dollar is indeed in its own long-term downtrend, and the Brazilian real strengthens as steps are taken to right the government scandal there, the U.S. could see increased export interest. Therefore, the fundamentals may not be as bearish as they seem for the domestic soybean market.

Lastly, I feel it fitting to follow-up on last week's column regarding hard red winter wheat. Yes, the U.S. Southern Plains was hit by a spring freeze last weekend while the crop was a good three weeks ahead in maturity. As of this writing the extent of the damage isn't known, but the market has taken notice. Like the NSI.X, both Kansas City futures and the DTN National HRW Wheat Index (HW.X) moved to new major lows early this month before rallying above February's highs. Both are also in position to close higher for the month, again establishing bullish key reversals. What I find most interesting this week is the fact that the HRW wheat crop had to die, presumably, for the market to see a rebirth.

Darin Newsom can be reached at darin.newsom@dtn.com

Follow him on Twitter @DarinNewsom

(CZ/SK)

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