There appear to be amber waves of grain and the color of amber appears bullish. More specifically, there appear to be a number of technical and fundamental indications that the commodity markets in grain - corn, wheat, soybeans to name a few - are displaying very bullish indications. As many recall, the soybean market, along with other grains to a more limited extent, went through the roof during the past year; the coming year may perhaps be a repeat in some similar way. Let's take a look at these indicators and focus on the corn and wheat markets.

Fundamental Indicators

In terms of fundamental indicators, the grain markets in the Northern Hemisphere have just had a bumper crop in corn and prices have plummeted to around the 200 level. This year's immense yield will likely be very difficult to repeat in the coming year and thus any such expectations may likely fall short, providing a contrarian indicator. Moreover, with soybean prices recently at record highs, it may be that many farmers may choose to plant a heavier concentration of soybeans over corn and wheat, thus potentially bringing about a lower yield in corn and wheat as a result. This would mean a lower overall supply and thus potentially higher prices for corn and wheat.

On the demand side of the equation, the increased usage of grains and sugar for use in the production of ethanol will likely continue, especially with crude oil prices pushing high to upwards of USD $60 per barrel in a sustained way as it now appears to the case. Ethanol has long been considered an alternative energy fuel and is being used increasingly worldwide, especially in Brazil. And even in some locations like North America, usage of ethanol may likely increase for other reasons than energy price increases - see our previous article on "Corn and Sugar - Two Energetic Commodities". Thus, ethanol usage may likely push demand for grains to higher levels in the years to come.

Even the trend of higher energy prices is putting added pressure on higher prices for the grains, due to a number of factors:

• higher energy prices, and in particular higher natural gas prices, translate to higher fertilizer and pesticide costs as many fertilizers and pesticides indirectly require oil and/or natural gas in some way

• higher energy prices translate to higher transportation costs to transport the grains to the wholesale and retail markets

• higher energy prices translate to higher production costs for the farmer for fuel required in operating tractors and other farm machinery in planting, harvesting, and distribution phases

Also on the demand side of the equation are the developing countries like China, India, the Eastern European countries and others that are rapidly developing from where eating chicken or other meats may have happened only a few times a year, to now where it may be happening once a day! In order to support such consumption of meats, it is obviously necessary to feed corn and other grains and foodstuffs to chickens, cattle, hogs, etc... thus demand for the grains is likely to massively escalate from this added animal consumption perspective, providing a further boost to prices.

Add to this the effect of approximately 20 million Chinese moving from the farms to the city, seeking a higher standard of living, would likely mean less of the Chinese in the farming industry and likely translate to some lowering of agricultural output... and this does not take into account the massive use of depleting groundwater resources in the Asian continent, including in China, that is now occurring and of which is substantially used in the cultivation of crops - increasingly diminishing water resources would likely translate into lower production and higher production costs.

Above all, one of the most fundamental indicators in general is the currency to which most commodities are priced in - the US dollar. If the US dollar value were to diminish, the prices of commodities would likely rise to compensate, as commodities are considered to be hard assets with some sort of enduring value; this is likely now occurring to some extent on some commodities already - for example oil has been even pointed out by OPEC in this regard. In fact, the US dollar has lost its value in recent years. Having depreciated about 35% over the last couple years, the US dollar still remains very likely to be overvalued, with particular consideration to continually growing twin deficits of the US budget deficit and the US current account trade deficit now hovering at over $1.2 trillion per year. By now, many are familiar with the artificial propping up of the US dollar by the Asian central banks in general in order to keep Asian currencies low in value to help support Asian exports of consumer products to the increasingly debt-ridden US consumer - should the Asian central banks begin to slow down their purchases of US dollar-denominated assets or worse yet, begin to diversify into other currencies or other commodity-related assets (such as into the Euro, gold, or Canadian resource companies as recent evidence suggests), the US dollar could begin taking a tumble to much further depths, thereby likely driving commodity prices in general to much higher levels. Indeed there appears to be some evidence of this regard. [1] This would very likely include the prices of grains.

Technical Indicators

Aside from the above fundamental indicators, there are a number of technical indicators that can be looked at that appear to provide very bullish indications for the grains.

One key technical indicator is the Commitment of Traders Reports (COT) for the grains. The COT Report graph is derived from position numbers of three key trader groups provided by the Commodities Futures Trading Commission (CFTC). The CFTC classifies the three types of traders as follows.

• Commercials - Producers and end users of the commodity or futures market they participate in are referred to as commercials. This group is the reason the commodity and futures markets exist, to allow "commercials" an opportunity to defer or hedge the risk of doing business. The commercials are shown in blue in the graph. The commercials represent the smart money group that will often get aggressively net long or short prior to major trends.

• Large Speculators - Defined as those traders who hold a specified number of contracts or greater in a given market, but are not commercial traders. The CFTC sets the minimum number of contracts that can be held before the speculator is required to report that position. Any speculator participating in a market that is required to report to the CFTC is known as a non-commercial or large trader. The large speculators are shown in green in the graph. This group follows trends and usually mimics the market price movement.

• Small Speculators - Any market participant who is neither a commercial nor non-commercial is a small speculator. This group is not required to report to the CFTC but can determined by the contracts left over after the commercials and non-commercials have been accounted for. The small speculators are shown in red on the graph. This group is usually wrong at the major turning points.

Below we show the COT for both corn and wheat.

Charts Courtesy of www.freecotcharts.com

As can be seen from the COT Report graph, the commercials net position has grown in the last few months to a net long position that is the largest in years. This is an extremely bullish indicator for the next few months.

It can be seen in the COT Report graph that for other times when the commercials went to a relatively high value of net long position, the peak of their position holding coincided with the low in the prices for the immediate time period but that then proceeded to rally to higher prices. For examples - see the commercials net long position peak around mid October 2003 followed by rising prices for the next several months.

Thus this powerful technical indicator is now appearing to indicate a strongly bullish scenario for grains prices in the upcoming few months. Let's look at some additional technical indicators for any confirming indications.

Two other technical indicators confirming the bullish outlook are the RSI (Relative Strength Index) and Slow Stochastics Indicator, shown below for corn for example.

Chart Courtesy of www.refco.com

Both the RSI and Slow Stochastics indicators are confirming that corn and wheat are recently in the general oversold area, indicating that prices are relatively low and oversold with a tendency now to rebound in the coming months.

Other confirming indicators are the Moving Average Convergence Divergence (MACD) and associated MACD histograms. The MACD histogram depicts the difference between the two moving averages in pink. Generally the histogram indicates that when the spread is below the zero line but starts to move upward towards the zero line, the downtrend is losing momentum and may provide an change indicator in pricing trend. The MACD histogram works well on the weekly graph, which is depicted below. These are depicted below for both corn and wheat.

Charts Courtesy of www.refco.com

Although the current MACD graph does not yet depict the faster average to be moving higher than the slower average, the MACD histogram appears to be slowing and perhaps just about reversing - this is a potential confirming indicator, and potentially sets the stage for the indicator to turn strongly positive at some time in the very near future. Further, from the much larger size of the histogram relative to other previous histogram sizes, the indicator appears to show that a fairly large rise in prices may be around the corner.

In sum, the above fundamental and technical considerations reveal a potentially bullish wave of the grains markets around the corner.

[1] Monthly data from the US Treasury reveal a sharp decelerationof foreign demandfor dollar-denominated assets - $61 billion average net purchases in July [2004]and August [2004] versus a $76 billion average in the prior 10 months. (http://www.morganstanley.com/GEFdata/digests/20041025-mon.html )