By James Hyerczyk
Commodity Trading Advisor
The hot, dry weather in the Midwest is not only affecting the corn and soybean crops but also having an impact on stocks. While corn prices are soaring, demand for fertilizer designed for dry soil is increasing. Demand for these fertilizers usually increases when yields are expected to be lower as farmers try to give their crops a boost. This is helping to drive up the prices of Potash Corp. (POT), Agrium Inc. (AGU) and CF Holdings, Inc. (CF). Additionally, hog producer Smithfield Foods (SFD) could feel the impact of high feed prices in the form of increasing production costs.
Corn supplies are expected to show a decline on June 29 when the USDA reports the size of June 1 stockpiles. The report is expected to show that corn supplies are declining at the fastest pace since 1996. According to analyst estimates compiled by Bloomberg, early estimates are for the report to show stockpiles at 3.168 billion bushels. This is 47 percent less than on March 1.
With the critical pollination stage taking place over the next two-weeks, the corn crop is vulnerable if it doesn’t receive sufficient moisture. Yields will suffer if the crop does not develop properly. While some are calling this the worst drought in a decade, traders should note that the rise in corn prices at this time of the year is typical because of the importance of the time period in the development of the crop. Seasonally, July 6 is a key date for a possible top. This could occur this year if timely rains hit at the right time in the right areas.
To better understand the impact that the weather has had on December Corn futures prices, one has to look only at the monthly chart. After taking nine months to break from 6.73 ½ to 4.99, the market has rallied in one month to over 6.40 per bushel.
Potash Corp. (POT) stock has taken off to the upside after reaching a bottom in early June. Based in the main range of $47.67 to $36.73, the market has quickly overcome a key 50% price level at $42.20 and is currently testing the Fibonacci price level at $43.49. Additionally, downtrending Gann angle resistance is at $43.67.
The first upside target is $43.49 to $43.67. This price cluster could develop into an important resistance zone or it could serve as a breakout area if the hot, dry weather persists. Another potential upside target is $45.67, followed by a test of the recent top on the weekly chart at $47.67.
On the downside, the 50% price at $42.20 could become new support, followed by the uptrending Gann angle at $40.98. A trade through $39.50 will turn the main trend to down.
The stock of Agrium Inc. (AGU) has also been on a tear since bottoming at $74.28 on June 4. Currently the stock is holding above steep Gann angle support at $85.16 and rapidly approaching the late April top at $89.90. Depending on the weather, this price could turn into another top or a breakout price.
On the bullish side, a move through this price could trigger an acceleration to the upside to the February 2011 top at $99.14. If the market begins to top in conjunction with timely rains, AGU could retrace as much as 50% of the rally from $74.28 to $89.90.
Soaring corn prices are likely to have an impact on hog prices also. Smithfield Foods (SFD) is one hog producer to watch over the near-term. Although there has been a surge in price since June 14, this stock is currently testing the retracement zone of the break from $25.12 to $17.92. This 50% to 61.8% area is $21.52 to $22.37.
This retracement area could prove to be a rally stopper if the impact of higher corn prices drives up costs, putting pressure on earnings later in the year. Besides the potential resistance zone, a downtrending Gann angle at $21.50 could also impede the rally.
A break through the Gann angle and the 50% price level will be a sign of short-term strength, however this will only be important if the market can establish support at $21.52. If this occurs then SFD may work higher to $22.37 over the near-term.
The stocks mentioned in this article have all been moving in the direction of the corn market and for the most part have ignored the general sideways-to-lower trend in the broader-based equity indices. This trend is likely to continue as long as corn continues to rally.
Traders of these stocks should be aware of the correlation with corn since corn is nearing its seasonal high date of July 6. Timely rains could stop the market and trigger a rapid sell-off, but until this occurs, the trend is your friend.