It was another explosive week in the markets. As old crop corn closed well above $7, and old crop soybeans well above $15, the market volatility was on center stage this week. Garrett Toay of AgTraderTalk says the markets produced extreme moves, but nothing has fundamentally changed in the markets.
“You’ve got new money coming in the market, and the interesting thing is you have the the May/July corn spread trading just like it did in 2012,” says Toay. “We had weather issues or weather concerns last week, but now those concerns are leaving, and the new crop values are starting to fall away. The tightness in the old crop situation stays. So, it’s a spread game at this point.”
The extreme volatility is something that could be the one constant in the markets this year, says Peter Meyer of S&P Global Platts.
“We have to expect higher volatility,” says Meyer. “Some people are making the case of the fact that the funds’ position limits were increased on March 15. We haven’t really seen that reaction in open interest. But what I have really noticed – and is of concern to me – is that ever since we had that one limit of bid day last week, the ladder, and by that I mean the bids and the offers in the market, has gotten very small. In other words, even yesterday around Fed time, it was single digits on the bid and single digits on the offer. The night before last we had the limit down move on very low volume.”
Meyer says while some analysts and traders are making a lot of noise about position limits, he doesn’t think it’s a major factor.
“What I am concerned about is even though the overall volume is okay, we seem to have less and less liquidity from a price standpoint,” Meyer adds.
The limit up and down moves in the corn market is rare for April. The extreme volatility is something that would typically occur during a major weather market in the summer months. Toay says while anything is possible in 2021, even with the limit up moves this week, history shows it’s rare that the new crop market highs are made in April.
“We put out some research here last week that we rarely set highs for new crop corn or soybeans in the month of April,” says Toay. “In fact, we’ve never set the highs in beans in the month of April.”
While Toay says April highs are rare for new crop contracts, he points out there are some interesting crosswinds at play today.
“You’ve got a tight domestic situation in the U.S., but you do have a weather market in Brazil with a Safrinha crop,” says Toay. “At this point, we’re starting into this dry period, and then I think people are starting to dial in some worst-case scenarios of 100-million-metric-ton crop potentially smaller than that. Because of liquidity, and like Pete said if you trade the front end because of liquidity, the Brazil drought situation is technically a new crop situation because it’s going to potentially shift more exports to the new crop S&D. But because of the liquidity in the front end, people are going to treat it in the May and July contracts. So, you’ve got a lot of crosswinds that are going on here, and I still think the new crop situation is tight enough, everything’s going to be on pins and needles.”
Toay says the commodity game has changed, especially considering inflation as a market moving factor.
“What I thought was impossible six months ago may be possible with just the amount of inflationary pressures that are building in this market and everything else,” adds Toay.
Meyer says the next key thing to watch is how USDA reacts in the May WASDE report.
“It’s going to be interesting to see what the USDA does with their May balance sheet in a week or so, when they first take a look at their 21/22 balance sheet,” says Meyer. “To Garrett’s point, I have higher acreage than they do and we still have a carry out basically the same in corn and actually absolutely the same in beans. I think if you use the Prospective Plantings number, we will end up with a negative carry out. So, it’s going to stay tight here.”
