Market Strategy: Agriculture Dodges A Bullet

 
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Historically, USDA’s June 30 Acreage and Stocks reports are market movers, and they lived up to their reputation this year with a limit-up move in corn and a 50¢ move in soybeans. Even wheat surged higher. Although the trade largely anticipated the lower acreage in corn and higher acreage in soybeans, the good news is that June 1 stocks of both soybeans and corn were lower than estimated. USDA extrapolated those lower stocks into higher usage in its July supply and demand report, lowering the carryout for both 2014 and 2015.  

Asset Management Improves. The new fundamental numbers for 2014 and 2015 crops sent shock waves through the market, catching the majority leaning the wrong way. The December 2015 corn price chart shown below tells the technical story of a market discounting a huge crop before its time. It reflects just how quickly things can change. It is a classic example of why I feel flexibility in one’s thinking and marketing are especially important, particularly in years where prices are very low.

The situation in which we found ourselves in mid-June 2015 really began with the top in the corn market in May 2014. Another good crop in 2015 seemed like a slam dunk with an early start to planting and nearly ideal weather. It created thoughts of piles of grain this fall and farmers dumping remaining stocks from the past year. Yet the piles and farmer selling at the bottom did not materialize.

The key takeaway from the past 16 months of price action is that we producers are doing a much better job of managing our assets through crop sales than 20 or even 10 years ago. We didn’t sell at harvest, even when conventional wisdom said we would have to. Nearly 3 billion bushels of added on-farm storage allows us to store all excess stocks of corn, soybeans and wheat. This indirect tightening of available stocks likely will not go unrecognized in the future. Producers have learned how to maintain beneficial interest and know when to hold ‘em and when to fold ‘em. 

Lows Are Behind Us. The fundamental change in this year’s crop situation came at a critical time. Farmers began to sell the first 10¢ move higher as the market turned positive technically. They continued to reward the market with sales, only to find their sales sucked up by money managers and speculative funds wanting to get out of the way of an exploding market. Farmer sales happened on rising prices, putting more income on the bottom line for last year’s crop and better pricing prospects for 2015 crops. 

Agriculture dodged a financial bullet June 30, and 2015 lows are behind us. The technical considerations for lifting nearly all short-futures sales before June 30 also gave the first post-mega-rally sell signal in July. Whether it represents a pause that refreshes or a top at the peak of crop hype is yet to be determined. “Realizing markets” can take time to evolve, as in 1993 and 2010. 

Corn Turnaround Reflects Shift in Fundamentals

The market assumed the 2015 crop would be a blockbuster, but rough weather in parts of the Corn Belt challenged that thinking and sent prices higher. Farmers held sales, helping their bottom line.

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