Market activity over the past three months has been spectacular in commodities and equities. This perspective will however focus on the grain markets. In 2012, a drought in the United States drove grain prices to new all-time highs. Corn hit over $ 8 a bushel and soybeans through to teens hit just under $ 18. Supply rationing has taken place.
The old saying goes that “high prices cure high prices” or, as some suggest differently, demand has been destroyed. In a very macro sense, this is what happened to commodity markets when the prices of corn, soybeans and wheat fell in the years to come. Better weather conditions, increasing technology and the sharp price spike have allowed supply to increase. It took several years of low prices before demand returned.
Yet from 2016 to 2019, prices continued to languish at a low level as global supplies continued to grow. The era of low prices lasted longer than most previous historical periods. A new administration has darkened the picture, pushing for new, hopefully better trade deals. This may have amplified the downward trend in prices. COVID-19 and an energy war infuriated the bearish mood in the spring of 2020, when there appeared to be little hope for grain markets. Still, a major turnaround and price rally began in August. What has happened and what is happening?
If high prices cure high prices, then low prices cure low prices. Producing grain nationally and globally at or below this cost of production only makes sense if you can complement the producers. Market facilitation payments and other government programs have helped many people survive. Yet the biggest and quietest event happening in the world was the growing demand. Trade agreements have also been concluded and implemented.
Since August, the biggest consumer of raw materials, China, has stepped up, buying large quantities of soybeans and grains from the United States. A year and a half ago, African swine fever ravaged the herd of pigs in China. If that hadn’t happened, it is likely that prices found a long-term low last year. Instead, it looks like this year, due to global weather issues and growing demand, the downward trend in prices may come to a predictable end.
In the August USDA Supply and Demand report, a significant delay was expected in the wake of high crop production estimates. Yet the winds of change were near. The report did not elicit a negative reaction, despite confirmation of the prospect of large supplies. Investment funds likely thought supplies were at their peak and would likely decline.
Dry weather swept through most of the Midwest, particularly Iowa, from late July. An abnormal windstorm wreaked havoc across Iowa, destroying perhaps as many as 300 million bushels of corn. China started to buy seriously, and the investment money poured into commodities. Fast forward to mid-November, and commodity funds have grown from 200,000 short contracts to over 300,000 long corn contracts.
Export sales have exploded at a rate never seen before. Trade agreements are in place, commodities are cheap, and the first sign of adversity in agricultural production quickly leads to massive purchases. The real question at hand: Have prices finally broken through the trough of negativity that has subdued rallies? The practice of massive fund selling has exasperated the downward price movement – is that changing?
It may well be that the tide has turned, and from that point on, demand-driven markets will buy lower prices, and adversity in agricultural production will accelerate the rise in prices. In the past seven years, rallies have quickly disappeared. This trend is probably over. As global supplies tighten and attention shifts to production, any hint of weather adversity and producer selling is likely slowing down and end-user purchasing increases. It looks a lot like the period 2006 to 2012 when prices hit a new platform and then held together for big increases. It took a decade to build global supplies. Possessing the physique was powerful.
Marketing preparation is key. This prospect inspired producers to become students of the market and learn to incorporate tools to create a balanced approach. These include the use of futures, futures and options. Knowledge is strength and the more you understand the tools in your toolbox, the better equipped you will be for what will likely be more volatile markets in the years to come. The bull is awake and the bear withdraws.
If you have any comments, questions or suggestions, contact Bryan Doherty of Total Farm Marketing. You can reach him at 1-800-top-farm, ext. 444.
Futures trading is not for everyone. The risk of loss in trading is significant. Therefore, carefully consider whether such trading is suitable for you in light of your financial situation. A previous performance is not necessarily indicative of future results.