We wrote in detail about the massive amount of commercial trader selling ahead of the August 12th grain reports in, "COT Report Shows Major Selling Ahead of USDA Reports," published right here at Equities.com. Corn is off by 5%, wheat is off by nearly 7% and soybeans are off nearly 9% since then. For this morning's commentary, we'll look at soybean meal which has sold off around 7.5% since the August 12th World Supply and Demand report.
The most important point to make is that commercial traders as a whole, have returned to the buy side of the grain markets. All six of the domestic grain markets we track have seen commercial trader momentum shift to the buy side. Grain processors clearly believe there is value in purchasing this year's inputs at these prices rather than waiting until November or December's expiration and the grains to hit the bins.
Looking at the chart below, it is easy to see why we track the commercial traders' movements within the commodity markets. It's long been our belief that no one knows a market like those who produce it for a living or, those who process it for a living. Commercial traders are value traders and know when their future production is priced too richly and should be hedged forward in the futures markets as well as knowing when their processing business should be locking in forward raw material input prices. Obviously, they're pretty good. We, however, are not growing soybeans or processing them into soybean meal. Therefore, we must be judicious with our capital exposure and attempt to place our money at risk only in optimal circumstances.
The commercial traders in the soybean meal futures market have accurately called nearly every move over the last 12 months. This is why we follow their lead!
We'll transpose the soybean meal futures continuous contract data above into the December futures contract for the purpose of preparing for our next trade. Currently, December soybean meal is trading around $308 per ton. At this price, it would be enough for our momentum trigger to fire a buy signal for tomorrow's trade. If this happens, the recent swing low of of $305.3 would be our protective stop point.
However, my personal feeling is that today's strength has more to do with the stock market than strength in the grains. Therefore, it wouldn't be surprising if the market doesn't hold these initial gains. I also wouldn't be surprised if we traded below the recent low of $305.3 before the market turns around. Assuming the market is a bit early to turn higher also coincides with the market's typical harvest seasonal rally beginning in October.
We're paying close attention to all of the grain markets as several factors are beginning to align themselves. Currently, only soybean meal and wheat are in oversold territory. We'll be watching for corn and soybean futures to join the oversold category in order to allow us to buy in at a discount to the current prices and ride the coat tails and seasonal strength to one last grain rally in 2015.
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