- The Barchart National HRW Wheat Price Index completed a bullish key reversal during May, indicating its long-term trend had turned up.
- Similarly, the Barchart National Corn Price Index completed a bullish spike reversal during May, a year after completing a bearish 2-month reversal that turned the long-term trend down.
- If the cash markets are telling us long-term trends have changed directions, the next step will be for noncommercial traders to start buying again.
A good friend read my mind first thing Thursday morning. Before the first cup of coffee was finished, I received a message asking the question that kept me awake as May came to an end and June began, “Do we trust the bullish spike reversals seen on the cash index charts?” My friend was talking about corn, where the Barchart National Cash Price Index (ZCPAUS.CM), the weighted national average cash price, posted a bullish spike reversal on its monthly chart while the Barchart National HRW Wheat Price Index (KEPAUS.CM) completed a bullish key reversal on its monthly chart. This tells us the long-term trends of the intrinsic value(s) of the corn and HRW wheat markets have turned up, exactly a year after both had signaled the start of long-term downtrends on those same monthly charts.
Part of the question has to do with the type of reversal patterns the indexes posted during May. As I’ve discussed in the past, there are four basic reversal patterns I look for, in what I have noticed is an order of reliability:
- 4-month highs or lows, the most reliable of the reversal patterns (e.g. lean hogs cash index during May)
- Key reversals, with contracts and/or markets posting outside ranges before closing higher (bullish) or lower (bearish) for the month (e.g. HRWI at the end of May)
- Spike reversals, with contracts and/or markets hitting new lows (or highs) before closing higher (lower) for the month (NCPI at the end of May)
- 2-month reversals, with contracts and/or markets closing at or near monthly highs (lows) the first month and near monthly lows (highs) the second month (seen on the NCPI chart at the end of May 2022)
Newsom’s Rule #6 is probably the most important rule of the 7, “Fundamentals win in the end”. Though there are times when markets stray from their fundamentals (see both live cattle and feeder cattle as May came to an end), eventually supply and demand comes back into play. But we have to keep in mind the important difference between real fundamentals (cash price, basis, futures spreads) and imaginary supply and demand (USDA estimates).
Are HRW wheat fundamentals bullish? This one is easy given Kansas City (HRW) futures spreads have been inverted since the end of August 2022. A couple things to remember: As Dr. Seuss’ Horton (from Horton Hears a Who) taught us, “an inverse is an inverse, no matter how small”, and two, an inverse in a storable commodity is always bullish. With this in hand, even knowing wheat’s tendency toward head fakes, I have confidence in the key reversal posted by the HRWI at the end of May. I’m not a fool, though, so I’d also have sell stops below the May lows.
What about corn, though? Am I still bullish corn fundamentals? Yes.
- National average basis remains strong. At the end of May my calculation came in at 34.1 cents over July futures as compared to the previous 5-year high weekly close of 10.4 cents over (2021) and last year’s mark for this week of 3.1 cents over July.
- New-crop futures spreads remain bullish. The September-December spread covered 16% calculated full commercial carry at Wednesday’s close while the Dec-March covered 28%, with 33% or less considered bullish. Going all the way out to the May24-July24, the spread covered only 6% cfcc.
The question then turns to the path laid out from 2010 through 2014, when the cash market continued to fall through the summer of 2014 due to improved weather and US production after three years of drought. I’ve talked about how cash corn has been following a similar path starting in 2020, and still in place through May 2023. If this is the case, then why won’t the cash indexes continue to move lower?
- First, because of the Analogy Fallacy which tells us because of Chaos Theory[i] there is no such thing as an analogous year (or set of years). The situation can be similar, but one difference can lead to a changed result. This time around that difference is…
- …much of the US Plains and Midwest continue to show deficit soil moisture readings heading into summer. Grain and oilseed futures (as well as most other production commodities) are weather derivatives at heart, meaning traders will position themselves to fit with existing weather situations and extended forecasts.
- Which brings us to the large net-short futures position held by noncommercial traders. The CFTC Commitments of Traders report (legacy, futures only) for the week ending Tuesday, May 23 showed noncommercial traders holding a net-short futures position of 62,267 contracts, the largest since the week of August 18, 2020. With old-crop supplies still tight (historically) and new-crop production coming into question due to weather, it would not be surprising to see noncommercial traders start to cover their short futures holdings.
Newsom’s Rule #1 tells us to not get crossways with the trend, but it is often difficult to believe trend changes when we see them. The reality is the markets are trying to tell us something, all we have to do is listen.
[i] Chaos Theory is one of my favorite subjects, and I highly recommend the book Chaos: Making a New Science by James Gleick. In a nutshell, Chaos Theory tells us one small difference at a key point in time changes the expected result, basically making forecasting null and void.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
