Newsom on the Market

By Darin Newsom
DTN Senior Analyst

We are more than a week past the end of the annual DTN/The Progressive Farmer Ag Summit and I haven't heard from my friend yet. You probably remember him; I've mentioned his notes to me before, those that read something like, "You know it's almost Christmas because Newsom is predicting sub-$3 corn again."

Of course, there are other ways to tell the holiday season has arrived: Hallmark Channels (yes plural) have been playing their Harlequin Romance novel holiday movies since late October, radio stations are on their 101,634th cycle (for the season) of the same tired songs and all the local playhouses are promoting their version of Dickens' "A Christmas Carol."

So, since it's the time of year to be merry and bright, I thought we'd take a little time this week to discuss new-crop seasonal patterns for the various commodities. Let's start with corn (shocking, right?)

First, some housekeeping: Seasonals are some of the first studies I started working on almost 30 years ago. They fall under rule three of Newsom's Market Rules (manage risk with filters), along with price distribution and volatility. I study seasonals by creating an index based on average weekly closes for a set number of years, then I divide weekly averages by the yearly average to find the weekly percent of annual average weekly close (simple, right?)

Lastly, seasonal patterns were a hot topic at the aforementioned Ag Summit last week.

None more so than what we see on December corn's seasonal chart -- particularly the five-year study. I chose five years because the last five U.S. crops have seen record production, so I believe it's logical to follow the new pattern this timespan has created.

And what a pattern it is.

Over the last five years the high weekly close -- for the 12-month period from December through the following November -- is the first week of December. Yes, last week's close of $3.85, seasonally, could be the highest weekly close the contract sees over the next 12 months. What might the low weekly close be, you ask? The tendency is for the low to occur the second week of October, 23% below the first week's close the previous December. Using the $3.85 from last Friday produces a seasonal downside target of $2.96. How about a summer seasonal spike? While a 6% rally shows up on the 10-year study, the best the five-year shows is a 2% bump from mid-May through early June.

The five-year seasonal pattern (used for the same reason as discussed in corn) for the November soybean futures contract shows more price swings over the course of the 12 months, from the first weekly close of November through the last weekly close the following October. The initial mark, this year $9.98 1/2, is on average the 101% mark of the annual average of weekly closes. From there it gets a 1% bump through late November/early December, putting the target at $10.08 1/2. The last week of November saw the Nov 2018 contract (SX8) close at $10.09. From there the market falls 3% through the second week of January, establishing an initial seasonal low target of $9.78 1/2. From mid-January through early June SX8 tends to rally 6%, creating a possible target near $10.37. It's pretty much downhill from there as the contract loses 11% through the first weekly close of October, making the target for the ultimate seasonal low near $9.23.

For December cotton (CTZ8), I still use the market's 10-year seasonal pattern. Why? Because cotton has not seen five years of record production over the last five crop seasons. And, in this case, it's better to have a longer-term view of seasonal tendencies. A side note: There isn't a lot of difference in CTZ general trend over five years and 10 years, only degree. As for those tendencies, Dec cotton posts a seasonal low with the first weekly close of December. In the case of CTZ8, that was last Friday's settlement of 72.08 (cents per pound). From there it generally rallies 9% through the second weekly close of April, putting this year's target near 78.60 cents/lb. After that, the 10-year seasonal sell-off takes Dec cotton down 8% through the fourth weekly close of July, establishing a target near 72.30 cents/lb. Late summer sees the market move sideways through mid-fall, before a late sell-off of about 4% to close out the month of November tends to take Dec cotton back to where it started the previous December.

Finally, there's the seasonal mess that is July Kansas City wheat. A look at its 10-year study shows a general sideways pattern between the 104% and 97% levels until a harvest sell-off from mid-March through the end of June sees the contract lose an average of 8%. The five-year study is more severe and is similar to what is seen with December corn. July KC wheat's five-year seasonal high tends to occur the first week of July to begin the 12-month period, followed by a general downtrend that has the contract lose 15% of its value through mid-June the following summer. This year's contract (KWN8) has already seen a dramatic sell-off of 25% due to last summer's unnatural high initial weekly close of $5.98 due to the weather driven spring wheat market. It's difficult to tell where KWN8 might want to go now, but this past week has seen the contract post a new low of $4.40 1/4 before rallying slightly. With the contract sharply oversold on its weekly chart, it could look at establishing a contra-seasonal uptrend that ultimately tests support between $4.83 and $5.10. But it will need some help to get there.

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

Follow Darin Newsom on Twitter @DarinNewsom

(BE/ES)

Copyright 2017 DTN/The Progressive Farmer. All rights reserved.