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Grain Prices Slump as Global Production Increases

   Fundamentals
The old trading adage that "the cure for high prices is high prices" appears to have worked, as record or near-record high prices in Corn and Soybean futures have encouraged global producers to ramp-up production. Large global supplies are expected to dampen export demand for U.S. grains, according to the latest USDA report.

On Friday, the USDA estimated U.S. Soybean exports would fall to 1.3 billion bushels, which is a reduction of 25 million bushels, as competition from Brazil and Argentina would take business away from the U.S. Lower export expectations and weaker-than-expected Soybean crush totals caused the USDA to raise domestic Soybean carryout totals by 35 million bushels to 230 million bushels.

The news for Corn was also deemed bearish by many traders, as the USDA raised global Corn production to a record high of 867.5 million metric tons this season, with China's production raised to a record 191.8 million metric tons. Despite record global Corn production, the USDA left its export estimate of 1.6 million bushels unchanged, but did lower domestic usage by 5 million bushels, which accounted for the modest 5 million bushel increase in U.S. carryover to 848 million bushels.

Burdensome global Wheat supplies are expected to weigh heavily on U.S. Wheat exports, with the USDA forecasting a 5% drop in Wheat exports to 925 million bushels. Wheat carryover was raised by 50 million bushels in the U.S. to 878 million bushels.

With prices currently at or near their lows for the year, it will be interesting to see if the USDA turns out to be more pessimistic in its usage and export estimates than actually occurs. Despite increased production out of China, the expectation is still that China will be a large buyer of grains during the coming year. Should we see some weakness return to the U.S. Dollar, we may see an upside surprise on export sales, especially for Corn in 2012, and to a lesser extent for Soybeans.

However, it still remains to be seen if this would be enough to halt the downward trend in the grain complex, especially with large speculators still holding net-long positions in both Corn and Soybeans. It may take further price weakness to drive out the remaining grain bulls before we start showing signs of an end to the recent bearish trend.

   Technical Notes
Looking at the daily chart for March Corn, we notice that the long-term uptrend line drawn from the July 2010 lows has clearly be rejected, setting the stage for potentially much lower prices in the coming months. Prices are below both the 20 and 200-day moving averages, and the 14-day RSI has turned weak, with a current reading of 34.80.

There also appears to be a potential head-and-shoulders pattern forming, with prices holding just above the neckline of this pattern. Should prices take out this neckline, the next major support point is not found until the 555.00 level. Near-term resistance is found at the 11/30 high of 616.00.

   
    CLICK HERE FOR THE FULL-SIZED CHART



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Derivatives involve substantial risk and are not appropriate for all investors. Please read the "Disclosure Statement for Futures and Options" prior to investing in futures or options.

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Posted by Mike Zarembski | View more articles by Mike Zarembski

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