From The Editor
October 12, 2012
Hello Pro Farmer Members!
It was a crazy week for the grain markets! At the top of the front page of this week's letter I tried to offer some perspective on the choppy, unpredictable, extremely volatile pattern of trade grains have "settled into" over the past couple of weeks. But, with limited space, I'm sometimes worried I keep a comment too short to really convey what I'm trying to say. So, I'll try to make it perfectly clear.
We are not bearish the grain markets. Yes, I realize we've recommended corn and soybean hedgers be 100% sold in the cash market, which certainly suggests we anticipate lower prices ahead. But there are a lot of different factors that come into play in making that recommendation. With prices "this high," there is tremendously more downside risk than upside potential; the structure of the market is providing no incentive to put crops in the bin; and basis is "strong enough" to make a terminal move in the cash market.
But none of that means we're bearish -- or bullish. You've probably heard a Pro Farmer editor say this before, but it's worth repeating: "Do not get more bullish as prices rise." The reason we say that is because the higher the price, the lower the demand in a commodity market. So as prices rise, less is used which should result in lower prices (or at least steady prices). And once demand is choked off, the job of the market is to find a price that will increase demand.
The price that encourages more use can be found two ways: 1) Hold prices steady for a long-enough period of time to allow users to adjust to the higher cost scenario; 2) Drop prices to encourage additional demand.
Both corn and soybean futures have decided to drop prices (compared to August highs) in an attempt to encourage additional demand. The trick now is dropping prices low enough to trigger the first round of aggressive buying by end-users. In a market with tight supplies, the first big buy typically triggers a round of end-user buying as they all extend coverage from a 30-day supply to "something" longer... like 60 or 90 days.
We haven't seen that trigger yet. We're watching the charts closes for a technical signal to reown a portion of 2012-crop cash sales, but we're also watching for that first round of end-user binge buying that typically happens when corn and bean markets hammer home a harvest low.
That's it for now...
Have a great weekend!
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