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Euro Watch

By: Rich Posson

June  05,  2014

Euro and the U.S. dollar: All financial eyes were on today's European Central Bank (ECB) meeting. The ECB lowered an important rate into negative territory, which is met to pressure banks to make more private sector loans in that it would be costly for them to park money at the central bank. Some in the trade believe this by itself is not enough to stimulate the Euro-zone economy and to reverse a dangerous trend of low inflation. And so some in the trade believe the ECB also needs to increase liquidity, otherwise known as print money. The initial response to today's announcement was an additional drop in the Euro. As the Euro declines the U.S. dollar rallies. A rally of the U.S. dollar could negatively impact export demand for U.S. commodities.

Related Link: Learn more about Rich Posson

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Wheat: Time for a rebound. HRW and HRS July wheat futures exhibit relative strength over SRW July futures. Wheat is technically oversold and the business-cycle model suggests a degree of undervaluation and time for a price rebound this month. For HRW, a close over $7.20 July would be a bullish sign. A close over $6.96 for HRS July would be a bullish sign. The lethargic SRW wheat market may have a change of attitude with a close over $6.19 1/2 in the July contract. There would then be potential for a rally to $6.51. Although the gap to $6.10 1/2 SRW July was not completely filled this week, I am willing to ignore the quarter-cent left of the gap. Volume declined throughout and the huge decline of prices in recent weeks suggesting a reduction of transactions as prices declined. But open-interest rose somewhat during the decline, which suggests net-new supply. However, open-interest was well off its high made in January. I found that French milling wheat futures prices (Euronext exchange) turned up in recent days, were relatively stronger than SRW and I think this is a start of a recovery, but still too soon to be of confidence. In short, I think wheat is a buy for short-term traders and perhaps even on a global basis.

Related Video: Rich Posson explains longer-term wheat cycle

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Corn: Open-interest rose from May 19 to June 3, suggesting net-new supply entered the futures market to propel price lower from $4.76 to $4.54. Whereas the decline before May 19 was of lower open-interest suggesting traders were mostly interested in exit of futures. I think the difference of the two phases within the overall downtrend relates to crop progress and a rise in emotion based selling under $4.76. Prices have met the better of downside price objectives and the business-cycle model calls for a rebound during this month. The research suggests corn is undervalued at this time. A close over the five-day average currently near $4.60 would be a sign at least a short-term rally is feasible. A possible objective if corn forges a bottom in the $4.50s July area would be in the range of $4.70.

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Soybeans: Tension builds. August futures prices trade between resistance of the five-day moving average near $14.19 and support of the 40-day moving average near $14.14. Tension is building toward a breakout in either direction. Some technical indicators were closer to oversold than otherwise, which suggests a slight bias toward an upside breakout. Volume increased in recent days suggesting rising transactions as prices were basically unchanged. Open-interest rose in recent weeks suggesting an inflow of money, but prices have stalled. Open-interest was still well off its February high suggesting traders reduced positions as beans rallied this year. Overall, I am of a bearish mindset and the business-cycle model warns of an important top due this month. I think if prices rally over $14.27 1/4 we should consider beans may rally for a while. Whereas prices under $14.07 1/2 August could be a bearish sign. Watch soymeal futures as I think the demand of meal may be the only reason soybeans have not declined. The U.S. crop is likely off to a good start.

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Soymeal: August futures exhibit relative strength to soybeans and open-interest for meal futures was of much stronger characteristic than of soybeans. So strong demand from an open-interest perspective, but price momentum had slowed. The business-cycle model suggests an important top is due this month. I think a return to $455 August would be a bearish sign, but some in the trade might argue such a price could be a buy the dip moment ahead of a summer rally.

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Cotton: The recent rally for July futures met the minimum objective of 88.00 cents, but I had favored 89.00 cents. I am concerned the abrupt retracement of this week's rally is a bearish sign. If not, then the bulls need reverse this market higher now. Otherwise, it seems cotton is likely to test 84 cents. I think cotton can correct higher sometime higher this summer, but recent price action warns it might be too soon.

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Cattle: In the Pro Farmer newsletter we called for higher cash prices this week and next. And this week there was some evidence of price appreciation. The August futures act strong with rising open-interest since last week alongside rising prices suggesting net-new demand. A new high for August for this year is feasible.

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Hogs: There is discussion that supply is to become tighter later this summer and due to the hog disease impact. But open-interest for futures is trending down and well off its February high suggesting traders continue leave this market. And volume was in a quiet sideways range since mid-May. The price trend of August futures is up from a low made in April and the business-cycle model does offer a chance for continued rally. But trade under $123.72 1/2 for the August contract should be a caution flag for those of a bullish mindset.

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Milk: September milk futures stall as allowed and may even correct this month, but the business-cycle model offers higher prices later this summer. Strong demand counters modest rise in milk production. Major support for September moved up to nearly $20.00.

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