Playing a Post-Harvest Rally

From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley

Commodities are streaking higher, providing plenty of alpha across the entire space to anyone who can pry their eyes away from their altcoin charts.

Cotton and coffee continue to rip. Crude oil and the energy space are grinding higher. Live cattle are breaking out. Even precious metals are starting to catch a bid.

But what about the grain market? Last week, we pointed out that our Minneapolis Wheat position had hit our target and that it was time to feed the ducks.

Today, we’re going to highlight a couple of grain contracts we want to keep on our radar for buying opportunities in the coming weeks and months.

Let’s dive in!

First up is the March 2022 corn contract:

Like many other cyclical assets, corn futures peaked in May and have since been chopping sideways in a broad range. As the consolidation continues to develop, price has repeatedly found resistance at a key retracement level of 589.

Our risk is well defined at this level. We also like how momentum has remained in a bullish regime as corn has digested its gains from last spring. The momentum regime is indicative of a consolidation within an ongoing uptrend, and we’re looking for opportunities to ride this primary trend higher.

We want to buy on strength above 589 with an initial short-term objective at the former highs from earlier this year around 640. If and when those former highs are taken out, we’ll be targeting 722 over a 1-3 month timeframe. 

To be clear, corn futures are a no-touch until there is a decisive resolution above our risk level. The last thing we want to do is get chopped up attempting to trade a sideways range.

Next we have the March 2022 soybean oil contract:

As you can see from the underlying uptrend, soybean oil led the bean complex rally into the first half of this year. Following some digestion of these gains, it now looks poised to lead the next leg higher as well. 

The setup is very similar to corn with the exception that our risk level is clearly defined at its year-to-date highs around 64.75. It doesn’t get much more bullish than new highs, and that’s exactly what we want to see from soybean oil.

The trade is to get long bean oil on a break above the year-to-date highs with a 1-3 month target of 73.75.

But we're only buyers on strength. Our bias remains neutral until we see a strong close above 64.75.

If we can’t trade the contracts above, there’s always the Invesco DB Agriculture Fund $DBA:

We recently highlighted DBA in a post about our Commodity ETF/ETN list. Here's what we had to say:

With cotton hitting its highest level in more than a decade and grain markets resolving higher, it makes sense to see this index pressing to fresh highs. DBA has been consolidating at the top of its range which coincides with the 161.8% extension since May.

Our risk is well-defined at the current level and we think it is only a matter of time until buyers absorb all the overhead supply and send prices higher. We want to be buyers of an upside resolution if and when we get it.

Here we are just a week later and we’re starting to see DBA resolve higher, so we'd be remiss not to reiterate this long setup.

We’re buyers of DBA on a decisive breakout above 19.50 with a target of 23.15 over the next 1-3 months.

There are favorable opportunities brewing in the grain markets these days, and these are some of our favorite vehicles to express a bullish thesis.

We hope you enjoyed the post!

Let us know what you think. We love hearing from you.

COT Heatmap Highlights

Author's Note: The CFTC did not publish new COT data this week due to Veterans Day. We’ll have updated data next week!

• Minneapolis Wheat: Commercial hedgers continue to add to their shorts. They are the most net short in history for the fourth week in a row.
• KC Wheat: Commercials added another 4,119 contracts to their short positions this week, as that total nears its three-year record. 
• US 10y T-Note: Commercial hedgers are the most net long in three years. 
• Coffee: Commercial short positioning increased last week to just 3,000 contracts shy of its historic level.

Thanks for reading, and be sure to download this week’s Commodity Report below!