- 2001: Volume 10, No. 4 What's Hot and What's Not: Watch for Bulls in the Cotton, Corn & Soybeans

The number of "hot" markets dwindled although corn and soybeans replaced cocoa and coffee as markets on the move. Cotton stayed in a strong downtrend but showed some signs of bottoming. Natural gas also reversed to the upside after a protracted and steep decline. Corn and soybeans finally sprang to life due to some unfavorable weather in the Midwest, and the U.S. dollar and lean hogs began to act toppy but are likely to remain in a major up phase. Beyond that, most markets stayed in two-sided phases or made abortive moves and failed to embark on sustained trends, notably the petroleum complex.

Cotton
Until very recently the cotton market was inundated with bearish news. U.S. crop prospects looked great, global supplies were forecast to rise, and demand was slumping due to weak economies. However, hot, dry weather in Texas over the past few weeks has probably put a lid on U.S. production potential. Once expected to get as high as 20.5 million bales, the crop now may not top 19.0 million. Even at that level of production, supplies should remain ample since demand isn’t likely to pick up anytime soon. On the other hand, the funds are short, prices are cheap, and this market may be ripe for a sharp weather inspired recovery.

Figure 1:

Corn and Soybeans
Hot, dry conditions spread from the Southwest and southern Plains into the Midwest, stressing row crops and setting the stage for reduced yields. However, the bullish trigger proved to be the USDA acreage and supply/demand reports which showed much lower than expected U.S. soybean stocks and smaller plantings. U.S. carry over for the 2001-2002 season was cut nearly 100 million bushels to 355 million. That number by itself isn’t alarming—i.e., prices recently fell to as low as .30 per bushel even though carryover for this season was projected at 270 million (it’s now pegged at 255). However, a 1.5 million acre cut in estimated plantings meant weather problems are much more of a factor, which sent prices sharply higher to establish a weather premium. In addition, the managed funds reversed from holding a large net short position to the long side, providing fuel for the rally. As for corn, acreage and carryover didn’t change much, but rainfall in July is the critical yield determining factor, and there hasn’t been much rain in Iowa and northern Illinois this month. Worse yet, some triple digit temperatures are expected this week in Iowa which could cause severe damage. Even a sustained bout of 90 degree temperatures in Illinois could cause harm because it’s so dry. Obviously, the bullish situation could change in a hurry if timely rain arrived. However, as things stand now, both corn and soybeans are likely to keep heading higher.

Natural Gas
Natural gas showed signs of bottoming tied to concerns that big increases in storage stocks would slow due to hot weather over the central U.S. Natural gas is used extensively for electricity generation to keep those air conditioners humming. However, at this point, it’s doubtful that would be enough to put this market into an up phase. For one thing, supplies are already at an ample level and should continue to climb. For another, the weather is actually mixed with normal to below normal temperatures expected across large areas of the nation (both coasts and parts of the South). Barring a bona fide heat wave across much of the U.S., prices are likely to stay in a downtrend.

U.S. Dollar
Even though the fundamental story arguably favors continuation of the strong U.S. dollar, the dollar has suffered various sinking spells over the past month. The dollar has been hurt by comments from European officials and U.S. manufacturers that the strong dollar is hurting U.S. exports and weighing on the European economy; and many have called for the U.S. to abandon its strong dollar policy. Most recently the dollar fell on concerns that financial troubles in Argentina and Brazil may lead to a full blown Latin-South American financial crisis, which could drag on the U.S. economy. However, since the U.S. government has said it won’t change the strong dollar policy (which could plunge the U.S. into a recession), and the U.S. has easily weathered previous global financial crisis (Asia, South America, Russia), and the Federal Reserve Board is pulling out all the stops with rate cuts to turn the U.S. economy around. The U.S. is more likely to end up being viewed as a safe haven and a good place to invest, meaning the dollar is likely to keep moving higher.

Lean Hogs
There’s been talk that the hog market is near a peak. However, demand hasn’t been hurt by the sluggish economy. In addition, the outlook for tighter hog supplies based on last month’s quarterly pig crop report, which showed that, contrary to expectations, producers won’t expand production, is likely to keep hogs trending higher.