18, 2006 -- Corn and the Dow Jones caught my interest this week with the former hitting its lowest levels in four months while the latter rose to levels not seen in three months. The corn market I am referring to is for December 07 futures and the Dow I am pointing out is for December 06 or nearby futures. I am focusing on07 corn and nearby Dow futures for this weeks column.
The Dow ended the week with a bounce and at a level not seen since May 5. The rally is no surprise since I have forecast repeatedly that it should improve into the Fall of the year, specifically October. After that, a move to lower levels seems likely. How much lower remains to be seen.
What concerns me is the W chart pattern of the Dow since June, when prices bottomed at at 10842 and closed this week at 11495. The chart is eerily reminiscent of the W pattern witnessed in Septembe, 1987, just before the Great Crash that took place in October, only a month later. Is the W pattern this year and in 87, an eery coincidence and nothing more? Time will tell.
In 1987, the Dow ran out of steam in September, the single most bearish month of the year for US equities. After rolling over, it leaked into October, with prices falling under the chart support that underpinned the W formation carved out in September. Once prices sliced thru the so called support at the bottom of the W, the market crashed.
The lesson is clear. Stay long with a stock portfolio unless Dow futures fall under the bottom of the June to August, W chart formation. That low point is 10842. If the Dow slices thru that point, the market will be in serious trouble. For now, don't agonize about your portfolio. Go on whistling that popular tune from the late 1980's, Don't Worry, Be Happy.
Corn producers and those bullish on corn prices have taken a hard hit since July 12, as nearby futures (not Dec. 07) fell from a high of $2.683/4 to this week's low of $2.191/4 a bushel. The market took an especially bad tumble when the USDA in their first, scientific survey of the crop pegged US production at 10.9 billion bushels. Adding to the woes of producers and prices is the weather that continues to be so favorable that the crop ultimately could peak at over 11 billion bushels.
But that is all old news. The market has already digested this year's crop size which is why prices are at the bottom of their trading range.
Now, the market is about to focus on the outlook for 07 and beyond. And for 07 and beyond, the outlook for corn prices poker hot. Poker hot!
Total corn usage will rise in 07, by 3 percent to 5 percent compared to 06. If so, that means total corn consumed from all sources will be 12.3 to 12.6 billion bushels. Ending stocks going into 07, after this years bumper harvest will be 2.4 billion. If US farmers continue to produce 11 billion bushel crops year in and year out stocks will become so tight in another 2 to 4 years that prices will be approaching at the very least, $4 a bushel.
.That is assuming farmers crank out 11 billion bushel crops year in and year out with a shortfall. Though the USDA estimates this years crop at 10.9 b/bushels, stocks will still decline by 800 to 830 b/b because demand is estimated to be 11.8.
This years crop is huge, yet stocks are falling quickly!
Over the years, I have always recommended that corn producers sell their crop at harvest and avoid storage costs, insurance, etc. I can no longer make such advice because the corn market is poised for much higher prices.
.Demand is outstripping supplies and on the first sign of a short crop or unexpected buying (China due to their worst drought in 100 years?) prices have $.60 cents to $2 on the upside.
Being bearish corn with prices for 07 futures , in the hole at the bottom of their trading range is not wise. Being bullish the Dow with prices at a multi month high also seems unwise now that September and October are at hand. That is my view on corn market and Dow Jones at this time.
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