Grains have continued to trend higher in recent weeks, as a combination of forces remained supportive. The rally in equities helped push grains higher, meanwhile supply and demand fundamentals have also been supportive. Indeed, the United States Department of Agriculture (USDA)'s prospective plantings report (released in March) showed that US corn and wheat planted acreage will decline by 1% and 7% respectively in 2009, meanwhile soybean planted acreage is expected to increase by only a marginal amount. From a technical perspective, all three grains look promising, and only a break below key levels of support would make us change our outlook. Moreover, we continue to see soybeans outperforming, with corn following closely, and wheat is expected to be the laggard - a view we first promoted in early February.
Front-month soybean has rallied quite impressively in recent weeks, posting gains of 19% since the beginning of March. It is currently testing resistance at USc1,040/bushel - a level we had highlighted previously. From a technical perspective, soy could find it difficult to break above this level in a sustained fashion in the short term, as equity markets have weakened slightly and the relative strength index has also entered overbought territory. As such, we would not be surprised to see a short-term retracement, possibly back to the USc975-1,000/bushel area. Over the medium term, however, both the technicals and fundamentals point to further upside. Indeed, trendline support comes in at about USc880/bushel, and if this level holds, the uptrend could continue for several months. Furthermore, we anticipate a global production deficit of 4.9mn tonnes in 2009, up from our previous estimate of 1.8mn, on the back of supply problems emerging from South America and still-strong demand from China. This will likely result in a further drawdown of global ending stocks to 48mn tonnes in 2009, from 53mn tonnes in 2008, and will see the stocks-to-use ratio decline to 21.3 from 23.1 in 2008, indicating market tightness. As such, we believe that both the technicals and the fundamentals point to further gains for soy over the medium term.
Front-month corn posted gains in March, and the technical picture is still encouraging in our view. Currently trading at USc392/bushel, we see an incipient uptrend forming, with trendline support underpinning the price action at USc380/bushel. If this support line is respected, we would expect to see further gains over coming the months. While the fundamentals are not as supportive for corn as they are for soy, continued drought in Argentina, combined with slightly lower US production will also be price supportive. We anticipate global corn production to outstrip global consumption, which should lead to a global surplus of 11mn tonnes in 2009. This should help bring global ending stocks to 140mn in 2009, up from 128mn tonnes in 2008. Furthermore, the stocks-to-use ratio is also expected to rise to 18.0 in 2009 from 16.6 in 2008. Despite the increase in market slack, both global inventories and the stocks-to-use ratio are still low by historical standards, which implies that an uptrend could yet be forming despite improving supply and demand balances.
Front-month wheat is also in an uptrend, although again, the price action is not as robust as it is for soy from a technical perspective. Currently trading at USc526/bushel, we do not rule out a retest of trendline support around the USc510/bushel area. The fundamentals for wheat are not very supportive of upside price action either. Indeed, we anticipate a production surplus of 42.8mn tonnes in 2009, which should see inventories rise to a six-year high of 162mn tonnes, and the stocks-to-use ratio increase to 25.2 from 19.3 in 2008. This wheat surplus (mainly driven by large increases in production in China, US and Russia) will likely keep a lid on prices. However, similar to corn, both global inventories and the stocks-to-use ratio are still low by historical standards.
Given these dynamics, we expect soy to outperform with corn to follow closely and wheat to lag the pack. However, we do acknowledge that the technical picture is slightly less convincing for corn and for wheat that it is for soy, and a break below support would suggest further downside for corn and wheat. As such, we will continue to monitor the technical picture for clues, but remain optimistic until key support levels are breached.
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