There are times when supply and demand factors coincide, suggesting that prices should appreciate in value. Last fall, corn prices for the December 2023 new crop traded near $6.35. March old crop corn futures traded near $7, resulting in an inverted price. The reverse occurs when the market is willing to pay more for the existing supply than is expected in the future. Tight global supplies may indicate that it is only a matter of time before new crop prices start to rise. However, that was not the case as the new crop is now trading near $5.75.
Actions speak louder than words. This quote may reflect what happened in the corn market.
According to many reports, there were reasons why corn prices rebounded post-harvest, a time when supply availability peaked. After farmers close the doors of their storage bins, a price rally is usually required to encourage sales.
Argentina, one of the world’s top corn exporters, has gone dry and is struggling with drought; the war in Ukraine continues; and the hectares harvested for the 2022 crop have been reduced. However, as the futures markets digested the news, small price increases were noted. Follow-up purchases did not take place and prices lost ground.
One reason is that a market needs buyers who are willing to buy at higher prices, believing that even higher prices are in store. In other words, while sentiment for higher prices may be supportive, it is not.
This suggests a few things relevant to 2023 corn prices so far. Corn prices are historically high. When prices start trading higher, traders look for momentum that encourages them to buy. If momentum slows while prices are rising, they can either remain on the sidelines or read this as a signal to be a seller. Another reason for the lack of recovery is that farmers know that prices are historically high and that high prices can disappear quickly. Therefore, between strong underlying stimulus and small futures rallies, they probably sold cash corn faster than most years. When commercial companies buying their corn don’t have an immediate market, they are likely to sell futures to hedge, which keeps prices under pressure. Another component of the lack of purchases is when those who buy corn for fodder, whether domestic or foreign, buy plentiful supplies when prices are low and only as needed when prices are high, hoping to that prices will fall in the future. This is known as a just-in-time inventory purchase.
The prices are determined on the futures exchanges. You can think of the exchanges as a centralized auction venue where all buyers and sellers come together. The futures price is the cumulative vote of all participants. If traders and buyers are unwilling to buy when fundamentals suggest higher prices, the dynamics of the market can change. A more illustrative example might be a room with 10 people all agreeing that the pricing picture is supportive. But none of the ten buys. They wait for others to buy first. Eventually someone will sell. Doubts creep in. Doubts have recently crept into the futures market.
Whether there is doubt or hope, markets will move. Talk to an expert about how to prepare for market moves. Be sure to understand the risks and rewards of your strategy before taking any positions.
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