Just hours after CME grain prices collapsed, with soybeans seeing the largest single-day drop since the 1980s, prices tried to bounce back Friday. Both corn and soybeans saw extended price limits to close the week and deferred soybean contracts at one point mid-day had climbed nearly 70 cents, with September corn trading 34 cents higher.
Thursday’s historic day in the markets may have been spurred by wetter and cooler weather forecasts, but Joe Vaclavik of Standard Grain says that wasn’t the only factor fueling the bears.
“I think the forecasts moving forward, and when you’re talking cooler and wetter forecasts during the last half of June and into even the first part of July, and some of these extended forecasts, that’s a really bearish deal,” he says. “And you have to remember that these large speculators have been so heavily long in these row crop markets for such a long time now, that it was enough is to cause some liquidation, I think.”
Bears in the Driver’s Seat
As the bearish factors built, watching commodity prices close on Thursday was like watching a building collapse. It started slow, then seemed to crash all at once. Bob Utterback of Utterback Marketing points out the November soybean contract fell to $12.52 on Thursday, which marked a $2.27 price move since June 7 when the soybean contract hit $14.80. He says that large of a price cut in less than two weeks will make it harder for soybean prices to fully recover.
“The summer rally is 50 cents in corn over $1.50 on beans,” says Utterback. “I think you have to have some hope that there is a bounce, but you also have to set your targets, and once it gets there, be satisfied. Unfortunately, the weather scare that needs to get market back to the plus $6 level and plus $5.25 further out will take some pretty severe weather.”
Vaclavik says if you look at the seasonality of the market, grain prices tend to top in June more than it does July, during the summer weather markets. So, while the story isn’t over for commodity prices, he says it wouldn’t’ be unprecedented for the markets to have already topped, hitting the highest prices for the year.
“It’s mid-June,” adds Vaclavik. “We talked about how weather forecasts and patterns are at least partially responsible for the sell-off. But the crop is not made, we’re not anywhere close to being at that point.”
Recipe for Higher Highs
Vaclavik says there are a few things that need to happen for the bears to continue to have a story.
“You need these rains that are in the forecast to come to fruition, you need these cooler temperatures to come to fruition, you need to see some better-looking crop conditions, perhaps, as a result of these rains that are in the forecast,” he says. “So, the market—to some extent—is just betting that these forecasts are the real deal, they’re going to happen, and we’re going to see these widespread rains in the central and eastern Corn Belt, we’re going to see these cooler temperatures. And if that doesn’t happen, it could be off to the races very quickly.”
Utterback says the traders will watch forecasts closely, with the Friday close and Sunday open important each week. But for the bull to get back in the driver seat, you’ll also need action from the Funds.
“You’ve lost the momentum of this bull, because once the funds start liquidate their position, historically, they don’t like to rebuild their position back up to the record highs,” says Utterback. “So, I think it’s going to take some extraordinarily dry weather conditions to regain the excitement that we had two weeks ago.”
Utterback argues that a 50% to 75% recovery of the market is even going to be difficult to reach.
“I think if you get back to the old highs, it’s a gift,” says Utterback. “But if you take out the old highs, watch out. So the form of how you sell is still very critical in this market. If you make take out those double tops with a gap, then you better hold on because it could get crazy for three-to-five-week time period.”
Watching More than Weather
Utterback thinks in addition to the weather, there are a few other factors that have to happen for grain prices to test or even break through recent highs.
“I think you’d have to see corn carryover drop from the 1.1 billion in the last report, you’d have start talking 750, along with the fear of that is going to get tighter,” says Utterback. “Secondly, you’re going to have to have China really come online and start saying, ‘hey, we’re going to be in that 32 to 35 million metric ton purchase area,’ which we’re still kind of in the dark here because the export sales now on new crop are not projected. And you’ll also need to start talking yields of 172 [bu./a] or 173 [bu./a]. The bull has kind of been on this ride since August, with China pushing it. Now the weather bulls have to push it. And so I’d say the next three weeks, you’re going to have to see the rains miss and the heat come in.”
After the markets worked Friday to recovery a chunk of Thursday’s losses, Utterback says next week, it’s all about the weather outlook during pollination.
