Analysis and Opinion »

Summer Brings on Volatility in Grains

David Becker
Share on StockTwits
Published on
www.iforex.com
Summer Brings on Volatility in Grains

The summer months marks a six-month cyclical pattern where traders generally see a sudden reversal in corn and wheat. The July 1 period is extremely volatile. The June 30 release of the crop report is one of the main reasons for the sudden increase in volatility in July.

Grain prices generally reflect the inflationary pressures of food items. As grains increase in value, underlying inflation increases while when grains decline, inflation declines. Corn, wheat and soybeans are the major grains that mark inflation.

Corn prices are very influential in the Agriculture sector. Agrium (NYSE:AGU) and Deere & Co. (NYSE:DE) have a very positive correlation with Corn. If corn prices are high, then farm machinery and crop services are in demand. Occasionally they do lose their tight correlation but the vast majority of the time it is positive to extremely correlated.

The Corn Tracking Fund (CORN) shown is directly investable. Deere & Co (NYSE:DE) broke out to 5 year highs in the second quarter of 2014. They have since pulled back slightly. Investors may want to follow the price movements in the grains to help find a directional position for Deere.

The corn fund has declined nearly 14% since mid-May and seems to have found support levels near the 30.5 area. Momentum has turned positive and in mid-June the MACD (moving average convergence divergence) index generated a buy signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crossed above the 9-day moving average of the spread. The index moved from negative to positive territory confirming the buy signal. The relative strength index (RSI) is hovering near the 37, level after falling into oversold territory earlier in the month.

Share on StockTwits