Commodities Corner: Midwest Floods Trigger Corn Crisis… What It Means For Consumers And Commodities Investors
Monday, June 23, 2008
by Lee Lowell, Futures Options & Commodities Specialist, Smart Profits Report
Welcome to the latest edition of our bi-weekly commodities roundup. This is just our seventh column - but we picked a good time to start giving you regular updates and profit-making tips.
We’re currently experiencing some of the wildest action and biggest moves ever seen in many markets. The price of oil and corn commodities alone have recently hit all-time highs, and as we forge on into the busy summer months, don’t expect much let-up in the action.
Let’s get started…
Midwest Flooding Claims Homes, Lives and A Piece of The Commodities Market…
While the energy market has continued to grab the bulk of the headlines, one massive regional event has resulted in the grain market grabbing more attention.
What started as merely a wet spell of weather in the Midwest quickly turned into a major disaster, as persistent rain and storms have resulted in catastrophic flooding across the region.
With thousands of residents forced to evacuate their flooded homes, towns submerged, and 24 lives lost, it’s a devastating situation. And make no mistake… although this has occurred in the Midwest region, the shockwaves are being felt across the whole country.
… And Leaves The Commodities Corn Market In Ruins
The Midwest is a major agricultural center, with Iowa the largest corn-producing state in America. And with millions of acres of cornfields flooded, this season’s crop is in serious jeopardy and the grain market has quietly made all-time highs.
We probably will see a total loss of the remaining corn being grown for this season. And as the media attention has propelled the market to the forefront of the news, it’s little wonder that the front-month corn futures contract just hit an all-time high over $7.50 a bushel. That’s $2 a bushel higher than the previous all-time high, hit in 1996 when the last great floods occurred in the Midwest.
So what does this mean for consumers and commodities investors?
The Trickle-Down Effect Of The Corn Crisis
Because corn is such a staple foodstuff, this will certainly have a trickle-down effect on other foods that rely on corn as a basic ingredient. For example, the cattle market (live cattle and feeder cattle) will be hit, as corn is the main feed ingredient.
The result of higher corn prices will likely cause farmers to lessen the numbers of their herds, thus reducing the supply of cattle on the market. In turn, this will no doubt cause the price of all meats to skyrocket at the grocery stores.
For investors, the situation poses a conundrum. While most markets are forward-looking entities and much of the loss in the corn crop may be factored into the price of the futures contracts, this is nevertheless an unprecedented loss to the crop, so it’s tough to say whether we’ve seen a top in the corn market yet.
The end of June brings a very important government supply and demand report, so we should see what the market holds when the report is released. Once farmers have had time to assess the damage, we may have a potential opportunity to short the corn market. But given the nature of this market, make sure you do so with limited risk option strategies like credit spreads, for example.
Let’s switch to the sticky stuff, and talk about the current price of crude oil…
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Price of Crude Oil Set To Break Past $140
Crude oil continues to chug along to even newer all-time highs.
The August crude oil futures (the current front-month contract) hit a high of $140.42 a barrel on June 16. This contract will act as the new benchmark for crude oil prices.
The surge means the price of gasoline has plowed through the $4 a gallon mark in many states - and may not come down any time soon, since we’re well into the summer season now.
Sure, there was an impromptu OPEC meeting over the weekend, but Saudi Arabia (the world’s largest oil producer) said it will only pump more oil if it feels it’s necessary.
While many folks would probably say “now!” is a good time to start, the theory is that the supply and demand factor is in balance for now, with price speculation and the low US dollar to blame for the runup in price.
The Saudis’ comments haven’t helped at all, as oil is up another $1 a barrel in today’s trading.
In technical terms, the crude oil chart is making a textbook “flagpole” pattern - one of the most reliable and bullish chart patterns you’ll find.
Don’t be surprised to see oil tack on a few more dollars rather quickly - and possibly blast through the $140 a barrel in the next few trading sessions. I know it’s hard to believe it could go higher than it already has… but we’re in uncharted waters now, so anything is possible.
Corn and oil aren’t the only commodities cruising higher…
Long On Natural Gas Commodities? Good Call!
Natural gas continues its continual climb, with hardly a breather - just look at this chart since February. With hurricane season officially underway and the southeastern portion of the United States again under threat, we might not see any significant pullback until the late fall. If you’re long this market, you’ve made the right bet. It will likely keep going.
Rangebound Metals
Gold and silver seem to be working themselves into a new trading range, with some large intraday swings along the way.
Once they find their breakout direction (higher or lower), they should continue in that direction for the foreseeable future. Both are still taking much of their activity from the oil market, so it’s wait-and-see for now.
But with both metals getting close to hitting their long-term support areas of the 200-day moving averages, they could eventually move higher.
A “Soft” Breakout
Finally… some potential breakout action in the “softs” market!
Having meandered along in a very narrow (and to be honest, boring) trading range over the past three months, coffee finally switched into bull mode last week when it popped 700 points higher on Friday.
This may be the catalyst that sends the coffee market in a new and sustained upward direction.
How about a big dollop of sugar in that coffee? The sugar market has suffered a merciless downside pounding recently, but as I’ve said here before, it was due for some kind of bullish correction.
It’s certainly seen that over the past nine trading days, blasting over 225 points. That’s a very large move in such a short time for the sugar market. Let’s see if it can sustain the momentum.
Finally, we turn to the strongest of all the softs contracts: Cocoa. The market recently hit a 28-year high and although it’s tough to tell if it has more room to run, the chart certainly looks very toppy.
We may see a near-term pullback, as traders lock in profits before embarking on another bullish leg up. If you’re looking to play the downside, buying put option contracts could be your best bet.
That’s all for this edition. Catch you back here in two weeks.
Lee Lowell
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