Head to Head: Price Strength Scenarios

August 5, 2014 09:59 PM
 

Q: The corn and soybean markets are now well off of their recent highs as production prospects continue to look strong. For producers who find themselves underpriced, what fundamental or technical features should they be watching for that can create price strength for which they can take advantage?

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Be on Guard For Possible Overselling

A change in weather to more adverse growing conditions would be a fundamental feature that could create but not guarantee price strength. For example, much-above-normal temperatures, much-below-normal rainfall or both could raise yield concerns.

Another fundamental to watch is export demand. Weekly USDA export sales and shipment summaries indicate if lower prices are enabling buyers to be more aggressive.

One technical feature worth monitoring is the degree to which a market might become oversold as prices move lower. Tools such as Relative Strength Index or Stochastic Oscillator help indicate a possible rebound. One could also combine observations of fundamentals and technicals. For example, if export sales increase significantly as corn prices weaken and the Relative Strength Index is oversold, it might signal that some strength is ahead.

Although fundamental or technical features can provide a guide to possible price strength or weakness, the management of these changes is most important to a successful marketing plan.

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Expansion of Demand Base Will Be Key

The USDA Acreage report confirmed our estimate of a huge increase in bean acres and a 5% reduction in corn acres. Depending on yields, a corn carryout of 1.7 billion to 2 billion bushels could be a reality. 

To stop the downtrend in prices, yield prospects must be curtailed by lower crop ratings, or demand must increase another 300 million to 600 million bushels. That could happen if cattle and hog herds expand or with more exports. Lower prices should also curtail corn acreage expansion in South America and Ukraine over time.   

Technically, we will monitor daily and weekly indicators for a sign that sellers have lost their appetite to drive prices any lower, as occurred in early December 2013 before prices rallied 80¢.  

For 2014, initial USDA reports forecasted a devastating 1.8 billion bushel carryout and drove prices to three-year lows. It only took seven months for usage to reduce carryout to 1.15 billion bushels. Hopefully, demand expansion continues into the 2014/15 crop year. If not, some inefficient producers could be in for tough times.

Disclaimer:
There is substantial risk of loss in trading futures or options, and each investor and trader must consider whether this is a suitable investment. There is no guarantee that the advice we give will result in profitable trades.



 

 
 

 

 

 

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