Is the Bear Market Over?

August 27, 2008 09:20 AM

Bob Utterback
, Farm Journal Economist

The sinking sound you have been hearing in the background since the end of June has been the more than $52 billion net change in the Chicago Board of Trade corn and soybean values. We are all shell-shocked right now and wondering what happened to spur the plunge.
Livestock producers who were ready to throw in the towel in June are now rethinking their decision to liquidate herds. On the same note, ethanol plants that were in the final stages of construction yet considered to be completely mothballed are suddenly looking at current values and thinking things might work out after all. Finally, the producer who was holding back on selling crops due to the uncertainty about yields is now sitting on inventory that may very well be priced at or below next year's cost of production.
It's no shock that high prices ration usage; the surprise this year was the speed of the correction. I expected the train wreck in late 2009, not now.
I remember telling producers in late June that now was the time to dump their inventory or make plans to store it until winter. All the talk was about how we were going to reach $10 corn because of fewer acres and a yield well below 148 bu.
Variables for the collapse? The rain stopped and exceptional growing conditions followed. We went from a delayed corn crop to one that USDA says is above the 10-year average and well above last year's crop.
While the corn and bean fundamentals have turned bearish, the real story has been the change in tone of the outside markets. Crude oil came off its record-high prices, as inventory builds due to declining world demand. The dollar has bounced off its lows, which adds pressure to U.S. exports because it costs buyers more money.
The final variable that came together to create a perfect bearish storm for the commodity complex was the trading funds' significantly long position. When the break started in the energy market, it forced some major margin calls and even caused some long trading funds to go into default. This forced position liquidation in corn and beans, amplifying the bearish fundamentals. The result: In less than 30 days, the corn market wiped out what took several months for the bulls to acquire.
What now? The corn and bean market decline going into the August report was more about margin liquidation than actual crop fundamentals. Granted, the crop looks good, but we are two to three weeks behind. We are already starting to have exceptionally cool nights for August. The concern of an early frost should start to surface.
Therefore, I would not be surprised to see a price bounce from late August into mid-September. If nothing materializes, assume a retest and a potential new low to occur in late September and blow out all of the bottom-pickers. Then, as we move into October and combines start to roll in the fields, I'm convinced that the harvested crop will not be as big as we have assumed.
This should stabilize the market but not spur a significant rally. What will add strength to the market is twofold: sold interest by the end users in buying corn for long-term needs and farmers' reluctance to sell at harvest.
When will prices recover? I hate to say it, but we may have seen the real price event. Several variables are going to have to happen to get the bull attitude back. First, we have to get the money people excited that inflation is going to persist and commodities are going to be better than equities. Second, we need a resumption of the downtrend in the dollar. Finally, some concern about supply needs to arise.
Let's review the market: Last year there was strong demand, inflation concerns, tight world stocks and an investment attitude that money was better placed in commodities than equities. On top of this, we had a spring planting event.
This year the corn, bean and wheat planting-mix decision is going to be tougher than ever. What are producers going to do with sharply higher input costs but potentially disappointing prices? Will they increase corn acres because they get better yields but not fertilize as usual due to high fertility levels? Or, will growers (due to banker pressure) plant more beans because of lower input costs?
Corn 12345678910
USDA's August report pegged corn yield and production at the top end of the range. Now the bear, more than the bull, must prove his case. This is the time for all feed buyers to lock in next year's corn needs. Equally, producers who sold corn too cheap this year should develop a reownership program by early September.
Please note: I expect two periods of strength. The first will be caused by uncertainty about frost and the late maturity of the crop. Then, real strength will develop once harvest is over, the bin doors have shut and the market must bid up corn prices to get the acres it wants for next year.
How high corn prices climb depends on final yields, if USDA can meet ethanol and feed usage projections and, finally, trends of the outside markets—namely oil, gold and the dollar.
I don't think there's much risk that corn will fall below $5; the more difficult question is how much upside potential we really have. I think there's more risk for the end user who needs to price than for the producer who needs to sell.
Beans 12345678910
USDA kept soybean yield low, which agrees with many producer comments I got about field conditions. It's important to note that we are ½ bu. per acre from stocks below 100 million and about 1½ bu. from running out. This type of situation makes beans extremely sensitive if any type of weather event occurs.
In the current market situation, I would be short only via a long put, rather than a short futures. Second, if you have a deep-in-the-money put, consider rolling down to a defensive $12 put right now. However, if November beans get back around $12, you don't need much downside protection into fall.
This implies all livestock producers need to get their meal needs locked in as fast as possible.
For unpriced inventory, selling off the combine could be about as good a time as any. As for reowning beans, the level of market volatility makes it difficult to be in the futures. This forces me to use calls. I know it's expensive, but being net long a call right now is the only way to manage your cash-flow exposure and your emotions in what could be an active market in the months to come.
Wheat 12345678910
The world supply of wheat is increasing, but much of it is feed wheat. This is causing the wheat market to sharply bounce up right now. My sights are set on selling July 2009 wheat. Now that we are higher than $9, don't let the market trade any lower before putting a floor on prices. I suggest protecting at least 50% and staggering the remaining 50% into this fall if corn and beans are able to rally.
My bias is to be long a put or short cash and long calls. If you are going to use futures, you must be an aggressive selective trader or at least have some form of long call in place to help with margin calls, especially if we are able to break above the $10 level in the July contract. In the end, rising input costs are going to attract more wheat acres simply because its costs are comparatively lower.
Hogs 12345678910
All I've been hearing lately is about how many hog and chicken facilities are considering shutting down. When you look at USDA's feed projection, something does not match up. Could livestock producers be stretching the truth about shutting their doors?
The tone of the market indicates that hogs are right on the edge of a major price event to the upside because of reduced inventory numbers. A close in December hogs higher than $79 per cwt. would be a clear sign of a potential upside breakout, meaning all hedgers should move into a limited-risk strategy. Equally, a close below $75 would strongly suggest something is really wrong and a net short position would be advised. This is not the time to fall asleep at the switch on your marketing plan!
Cattle 12345678910
While the cattle market's recent sell-off in June and July contracts has hurt, it has actually put the industry on firmer ground. I urge producers to only protect downside risk if December closes below $105 per cwt. and even then with only a defensive long put position. A close above $110 would be a clear sign to have limited price protection in place. 

The information provided is believed to be reliable. There is a risk of loss associated with trading futures and options. Anyone acting on this information is doing so at his/her own risk. Consult your Risk and Options Statement before trading. To comment on Outlook, e-mail For information on risks and strategies or to subscribe to Bob Utterback's Internet site or e-mail service ($400 per year), call (765) 339-7704 or e-mail You can read daily comments from Utterback after markets close at

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