Is Rays ship about to come in?

[deasmatt90]

Here is another chart using an old resistance of 3.33 made back in 2004 / 2005 crop year for a support line. Which makes it look more like a descending triangle. Look back farther. How mAny bull markets were preceded by a descending triangle in corn? I'm asking this because I don't know. My charting only goes back twenty years. Rayfcom could you post ur chart with trendlines?

[deasmatt90]

Here is another tidbit of info I found just for reference. 

[deasmatt90]

Twenty year weekly chart with decending triangle pattern and support lines. I had to do two pics because it wouldn't let me shrink the whole chart down in screen. To all producers who don't know this, these lines are very important to these traders. when you see a break out above these lines it's because they are having to buy back their positions. They are losing money with each tick above that line. That line is where they took there short positions following the trendline to maximize profits. A break out above that trend line proves that they are in a losing trade and they become frantic to get out creating a buying frenzy in the market. At the same time they are getting out new money steps in buying along with them afraid of losing out on the new trend. Many times short lived but good to know how to read to take advantage of situation and capitalize when selling corn or any other commodity. 

[deasmatt90]

Also note how the market high of 04/05 became the new support area in the following years.

any thoughts rayfcom?

[rayfcom]

Okay deasmatt90, thank you for your considered insight in what you wrote, you have done much to make this an interesting conversation.

First, about the symmetrical triangle. The degree that it is useful in predicting subsequent market moves is based on where it came from. If its a consolidation from a downward move, it usually indicates a coiling of the spring that resolves with an explosive move downward. Then it becomes a bear pennant. If it forms after an upward price move, then its pointing toward higher prices, in which case its a bullish pennant.

The triangle forming now traces its beginnings to June 2016, forming after a very big down move from the highs in 2012 at $8.43. That makes this triangle a bear pennant formation, and the way to measure the predicted downward target is to subtract the length of the flagpole of the pennant from the last high registered just before there is a breakdown through the upward support line of the triangle. Alternatively you can measure from the apex of the triangle, Its kind of complicated without being able to provide drawings, but suffice it to say that if this triangle holds, the downside target will be between $2 and $2.65.

In terms of supply, what the last few years of production combined with the high price of acreage to buy or lease, all are telling me is that there are a lot of corn farmers just managing to get by. Perhaps they saw corn farming as their chance to make a business for themselves, perhaps they were displaced out of other careers and saw corn farming as their only way to make a decent living, I don't know. What I do know is there is a tremendous impetus to grow as much corn as can be grown, hoping to offset lower prices with greater volumes. And that is a recipe for lower prices, because you have farmers making poor economic decisions because their financial foundations are on weak legs. These farmers have to plant, they cannot afford to leave any of the land they are paying for stay unproductive, so they plant., If there was an alternative to corn they would plant it, but at least for the last few years, the grains all seem to be moving in lockstep, so changing what they are growing probably will not occur. 

As long as these farmers at the margins are pressed to produce or lose their livelihood, they will produce every time. Which means that the conditions that created the over supply will continue barring any big weather changes. This is the production that makes the difference in 170 bushels or 180 bushels per acre, and thus the difference as to whether or not corn can mount a successful overtaking of thew $4 level. There is no choice for these farmers, they are in the game up to their necks now, its either farm or starve. The only way the market will clear this overproduction is when prices drop far enough to push these over-producers out of the game. The weak hands have to be eliminated for the strong hands to prosper. Sop a good recession accompanied by a washout in agricultural prices probably is what is needed to reverse the bear market condition in corn, especially since one of the only country's with the potential to consume so much more as to have an effect on prices already has stockpiled a huge amount of corn for the next several years.

Crude has a different dynamic since there really are no marginal crude producers save for the shale wells, and even that is changing through consolidation.  For crude oil to plunge the way it did at the end of 2018, only a sharp change in demand could be the culprit. Wells around the globe were producing at full tilt and still that had not been enough to halt prices from rising from the middle of 2017 to October of 2018. Something big occurred to reverse that market, and it couldn't be on the supply side because no one had that much capacity to pump more oil. The down move was caused by someone big cancelling the prior purchase of crude, and with it they took on the responsibility of loss that the seller of the oil was indemnified against, Hence, the rapid drop in price as liquidation was all that mattered to the seller(s) who had been stiffed. You can bet it was the Chinese who had to stop the purchases, because they were the only country where manufacturing could have taken such a big hit so as to collapse the oil price that fast. Because there are a limited number of oil producers and large scale consumers, the pricing dynamic in the crude oil market is a significantly different than in agricultural commodities, and one big producer can wreck havoc on that market almost immediately.

[rayfcom]

Thank you for the charts, deasmatt90, they show quite clearly what I was saying about the downward flagpole from the 2012 highs, and the pennant that formed since. I would suggest that you look back to the mid-1980s through the 2006 time period and notice that the long run price for corn trading was between $2 and $3 per bushel. I didn't happen to notice what the price of production was back then, but it seems to me that the trading range back then probably was the long term equilibrium price for corn, and that's probably where we are headed back to.

The cost of production does not determine the price where corn will trade in the short run, it determines the price that will push producers out of the business after a number of years of losses. I think that the price of buying/leasing acreage tells you the same thing a lot faster. But the bottom line is that there should be a lot of corn farmers going out of business in the next few years as long as land costs continue to be so strong. And over time that will reduce supply and and reduce land prices so that corn farming will become profitable for most. But I caution you that process is not going to happen overnight, it will take a while before many of the farmers on the bubble finally throw in the towel. 

Its rather usual that the old high becomes a support level once pierced, and the old support line becomes resistance once broken. It has to do with the psychology of the marketplace...places where a lot of people were wrong by selling and being over run tend to stick in the memory, and when traded again cause market players to want to do what they should have done before and buy at that resistance level. Same at places where many thought it was a good buy, once broken down through it becomes a good place to remember to sell.

[deasmatt90]

Rayfcom could you post your chart with drawing?

[deasmatt90]

Also yes a descending triangle as all of the ones I have posted are a general sign of a bear market but what happened each time it reached the cost of production? if it's at the break even price of production wouldn't that kinda being like a stock being at $ 0.00 ? If the price of a stock is at zero then it can't go down, it's at zero. So the only way this could happen is the cost of production going down bringing the " zero " further down which is not impossible. The only area I believe would be land rent, do to the chem manufactures an equipment dealers not willing to drop their prices. And when I say this can't happen what I'm saying is long term ( six months or more ) not just a one or two day move, that is very possible to do with a little market manipulation by the market makers.
Not agreeing or disagreeing, just very skeptical of a continuance down.
Also rayfcom did you notice in the historical breakeven price chart I posted the difference in breakeven prices between 2018 and projected 2019 and the projected yield with each year? Ha! I call bullsh*t Iowa state! Looks like usda has been sitting in!

[rayfcom]

My feeling is that the cost of production and the price of corn are mutually exclusive save for the long term. Example : you buy a farm and all your costs go up, but there still are too many farmers producing too much corn because that's their business and they need revenue to pay their bills. So for year one you lose money, and if the production costs don't fall, you lose money in year two. And you will keep at it, hoping that production costs go down, until you have no more savings and no more credit to continue the business. That process takes a while, mainly because its human nature to be optimistic when your life is at risk (in this case your financial life). The problem is that the raw material producers who provide you with the necessities for growing corn will only adjust their prices when their input prices fall or if demand for their products drops. Input prices for the most part are not determined by whether or not the farmer makes a profit, save for land costs which change only when demand for land falls. Demand for the raw materials as well as land prices will drop only when marginally more farmers throw in the towel and head for bankruptcy court.

Which is why you see so many bankruptcies in the farm industry and why you have a perpetual boom and bust economy in that industry. 

So once we recognize that for the short and intermediate terms, corn prices move independently of the input prices to grow the corn, we are left looking at the short and intermediate term fundamentals and the technical charts (which are an x-ray of the psychology of the market) to determine where we think prices are heading. Even if I have a bullish idea about the market long term - such as now, when I think the marginally profitable farmer will be squeezed out of the business by a recession that will drop prices, resulting thereafter in lower supply and rising prices for the long term - I have to respect the short and intermediate term moves or I will be blown out of the water on the mark to market losses before the market makes its longer term up move. Same with the farmer - unless he has enough capital or credit to finance the losing years, he's not going to be in business still when the longer term fundamentals take hold and push prices higher.

Hence we have the business cycle. Now for many industries methods have developed to ease the peaks and valleys of their respective business cycles, but these cycles probably cannot be eliminated, They are a natural course of business.The measures that would be needed to completely rid business of the business cycle create more problems than they solve, so it really is a fact of life that you have to get used to and prepare for no matter what business you are in. For farming, you could tighten credit conditions so that marginally profitable farmers would not be able to get the credit they need to keep their businesses running, or you could ease credit conditions so that everyone gets credit to whatever amount they want. The first proposition makes it too restrictive for even farmers with good profits to get the credit they need to run their businesses, and the second proposition is untenable because at some point the losses will be beyond what the marginally profitable farmer will be able to repay.

So the bottom line on all this is we need to be very conscious of the supply and demand dynamics of the short and intermediate term if wee hope to have a chance at accurately predicting where corn prices will be heading at any given time. 

You asked earlier if I could post a chart of corn that I used to define the triangle formation and bear pennant that I am talking about. I look at a lot of charts, but for this specific issue I think the Monthly Continuation Chart dating back to at least the beginning of 2012 will give you the clearest picture of the formation that has been building.

Regarding the projected yields, its always a crap shoot. USDA has shown their methodology to be sorely lacking on more than one occasion, and most analysts have not fared much better. I mentioned previously the name of Arlan Suderman of IntlFCStone as an analyst who I have found does a good job of predicting yields and carry for the future, and there likely are others. Suderman called the big upward revision to China's carry of corn long before USDA got it, so I thought that was a validation of his models. In reality, market prices will tell you what yields are going to be long before any economist or analyst gets it right, because the marketplace is the hub where over or under-supply of corn will become apparent through movements in price. Especially when price movements occur that are counter to what the technical charts were predicting. For example, in early 2018, the charts were very negative, yet the prices kept increasing. All  the fundamental data at the time was confirming what the charts were saying...but what few people knew was that the Chinese were loading up the truck with corn. The only way you could have known there was an under-supply of corn at that time was to look in wonder at prices going up when every indicator said they should be going down. Nearly a year passed before the reason for what happened was revealed. 

Which leads us back to price once again. Follow the price trend and its probably all you need to know.