— Rumors of legislation or policies under consideration, regardless of how likely they are to become law.
— The mere fact that prices are being pushed either up or down can cause speculators to liquidate opposing positions and distort price action.
— Sometimes crop prices actually increase because there is physical demand for grain or oilseeds, reducing supply in the market.
— Sometimes grain prices fall because the grain’s producers respond to a selling price they deem favorable and increase the supply in the market.
The funny thing is that from an economic perspective, the last two factors are the most important but least reported influencers on prices. As I see grain markets in a room full of noisy amateurs, each crop has two silent elephants at its back that set the limits of market behavior it will tolerate: producers and end users. These two put up with a lot of nonsense, but in the end they are the two influencers most connected to reality and also have the power to reverse a trend. The more we focus on them, the more likely we are to recognize a good price opportunity when we see it. This does not mean that we can predict prices; It’s too loud in the room for that.
Applied to recent markets, March corn prices in the upper $6 ranges in February were 33% above USDA cost of production estimates, a historically generous opportunity that was higher than historical corn prices the market would have earned at 9% closing inventory ratio . It’s still possible that Brazil’s corn crop will struggle in the coming months and push prices higher, but nothing is certain. At DTN, we recommended a final sell of old crop corn on Feb. 15 near $6.77 a bushel; $6.77 a bushel was an attractive price for producers.
In soybeans, the decision to make an outright sale of old crop soybeans on Tuesday, February 28 was more difficult. Readers of this page may recall the February 17 column, “Can Old-Crop Soybean Prices Go Any Higher?” at https://www.dtnpf.com/…. In fact, as I’ve explained, there’s a good argument that supplies of legacy soybeans will remain tight in the US this summer, even as Brazil’s bumper harvest looms.
The final decision to sell depends on profitability. The March price of $14.93 at the time of the recommendation was 25% above the USDA’s estimated cost of production for 2022, another generous opportunity with no guarantees of what will happen in the future. The USDA ending inventory to consumption ratio of 5% does suggest a higher price for cash soybeans, but I was also concerned about the more emotional players in the market and the risk they bring. March soybean uptrend stalled near $15.50 as Brazilian farmers harvest record supplies. Wednesday’s lower trading turned the weekly stochastic rate lower, raising concerns about renewed pressure on non-commercial investors who hold significant long soybean positions.
In the end, it was the profitability of the opportunity that had the final say and saved us from becoming paralyzed by the confusion as we tried to guess what emotional traders will do. Looking ahead, it’s entirely possible that corn or soybean prices will trade higher this summer. However, if we, as risk managers, judge ourselves by what the emotional market ends up doing, we miss the more valuable lesson of whether or not we made a good decision with the information we have. Focusing as much as possible on growers and end users is my best advice for learning how to make better marketing decisions for your farm.
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The above comments are for educational purposes only and are not intended as specific trading recommendations. Buying and selling grain or grain futures or options involves significant risk and is not suitable for everyone.
Todd Hultman can be reached at [email protected]
Follow Todd Hultman on Twitter @ToddHultman1
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