Power Hour: Be Patient, Commodities May Rebound

October 5, 2012 09:31 AM
Power Hour: Be Patient, Commodities May Rebound

Markets have taken both corn and soybeans to the woodshed, giving them a severe price beating since their peaks in early September.


Power Hour webPrices moving forward need to firm up a bit to if markets are to convince farmers to do much selling, says Frayne Olson, ag economist at North Dakota State University. Indeed, just this week, both key commodities have shown a bit more life.

Despite corn’s $1/bu. dip, selling some off the combine at $7.50 is still a very good price, even for a drought year, Olson believes. Don’t get overly aggressive about giving your harvest its total marching orders just yet, however, he says. "Present market signals are mixed about putting corn in the bin and storing."

"We actually are seeing an inverted market" with cash and futures sending different signals, he says. The cause? Areas with low test weights and aflatoxin that could impact basis by buyers who need corn now, whether exporters, livestock feeders or ethanol plants.

"Quality issues will not be addressed by the futures market, rather "the cash market has to do that," he says. "So I look for discounts (in some areas) to soften in the near future." As a result, producers need not only look at national and international factors driving futures prices, but highly localized factors affecting the cash price.

"Overall, though, we’ve probably seen corn’s peak," Olson adds, but that isn’t to say there won’t be some upward bumps along the way that farmers should position themselves to take advantage of. "I look for the price pendulum to swing back."

The fact remains that this is still a very short crop, and prices have to be high enough to choke off demand, which in Olson’s view hasn’t been done sufficiently yet. "I don’t think we’re in a bubble. We haven’t seen enough corn rationing. We have to cut 1.6 billion bushels of use from last year."

There are important reasons for the grain’s downward momentum until this week. First on Olson’s list: "The major sell-off by the investment community. They felt we were experiencing the peak and realized that prices were probably headed lower."

Second is the view that corn’s production number is pretty well known and unlikely to change much moving forward, even though USDA may reduce the harvested acres number in the October 11 crop report. That’s the next set of numbers to watch for.

Once the trade agrees on production numbers in droughts, prices almost always drift lower as some of the emotion leaves the market, this year being no exception. Moreover, yields in some areas—and this applies to both corn and soybeans—"are coming in a little better than some thought," Olson says.

With soybeans’ $2.50/bu. slide—nearly a 50% retracement—the oilseed offers even less immediate selling incentive than corn, Olson says. The possible driver to stronger prices would be any hint of production problems in Brazil and Argentina. If there is and prices somehow climb back to $17, "you better be selling," Olson says. "Don’t get too greedy." He sees a lot of volatility in soybeans, which he thinks are likely to trade in the $15-17 range. 

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