Up, Down, Up, Down, Down, Down, Will The Market Turn Around?

The wisdom of Sir Isaac Newton has manifested itself in the grain markets over the past several days. You know, “what goes up must come down;” and falling grain markets make one wonder whether the market is correcting itself or whether a significant top has been put into the market and those days are past. We’ll get the thoughts of some authorities.

Darrel Good at the University of Illinois reports in his weekly newsletter, “December 2008 corn futures increased about $2.00 per bushel during the month of June, topping out just under $8.00. During the same period, November 2008 soybean futures rallied more than $3.00, topping out just under $16.37.” But since those heady days, December corn has dropped $1.80 from its high in late June and November beans have declined about $2.30 since the early July top. While Good says corn prices have dropped more than 20%, beans are down about 15%.

Melvin Brees at the University of Missouri is not worried, and in his monthly newsletter
he says the declines are just the typical seasonal movement of the markets. Both Brees and Good point to bullish and bearish news in the market.

In the corn market, the high prices have curtailed feed, export, and ethanol demand to some degree, and the resultant rationing has allowed ending stocks to rise, which is a negative factor that has softened prices. However, the weaker corn price has allowed a wider margin for ethanol profitability and Darrel Good says, “Corn consumption for ethanol should continue to increase as forecast as corn prices follow crude oil prices.”

In addition to the demand scenario, the actual supply will be important in the analysis of Brees. He says there is still no real confirmation of a 78.9 million harvest acreage figure, nor the 11.715 billion bushel production; and all of the flooding could still cause acreage and average yield to fall from those levels.

In the soybean market, Brees says new crop production will be consumed by new crop demand and the tight carryover will remain tight. Good calls that resiliency in price, helped out by the uncertainty of the US crop size, and the on again-off again export conflict in Argentina. He says while crop ratings are generally good, the lateness of the crop has to make the market wonder. Good says the Climate Prediction Center is giving a favorable outlook for August weather.

Additionally, cash prices for both corn and beans are weaker because of the high energy prices that have affected the entire economy, says Brees. He also says ethanol’s negative publicity is generating calls for policies to be changed that would be negative to the grain demand and corn prices. He is also concerned about the criticism being leveled at speculators in the market because if they leave and liquidate their holdings, corn and beans would be sold at bargain basement prices.

So what is next? Brees says there is always significant downside risk and lower prices for corn and beans are quite possible. In Good’s insight, “The same factors that have been contributing to the extreme price moves of the past four months will continue to be important for corn and soybean prices for the next two months.” Both agree that supplies will be tight for the old crop, as well as the new crop, even with good growing conditions for the rest of the season. Brees says new crop corn futures are at the top of the USDA’s projected price range, and soybean futures are well above that benchmark.

Brees says with the downside risk it is important to watch for opportunities to make pre-harvest sales or obtain price protection for stored crops. Good says there is more than the typical amount of uncertainty about acreage, and even if prices continue to weaken, they could settle in a sideways pattern until production prospects unfold. He expects large daily price moves.

Summary:
Corn and soybean prices have dropped 15-20% since their highs in the last several weeks, as the market price rations the crop. That weakness has resulted from increased prospects for carryout, particularly in corn, but the weakness should also strengthen ethanol margins. Acreage is still an uncertainty for both corn and beans, and while large daily market moves should be expected, prices should shift from a downward slide into a sideways pattern until more information is known about production prospects. There is substantial downside risk to the market and good price risk managers will either make some pre-harvest sales or protect crops going into storage.