Expect Volatility to Increase
Grain and oil seed prices have experienced historical volatility over the last several years, especially due to weather, supply disruptions, COVID, and a major war. As 2023 unfolded, prices were on the defensive, trending downward on expectations for world supplies to grow while demand diminished, as noted on weekly export sales and ethanol grind. Now, the price for corn, soybeans, and wheat are low enough that an expectation for continued low prices could be a mistake. If near-ideal growing conditions continue throughout the world, then the overall price trend may remain lower. The odds may be starting to stack against this view with the market already factoring in big crop expectations. Recognize that prices are becoming a value to the end user and a more aggressive buying practice may suddenly surface, especially when all the uncertainty for growing crops in the Northern Hemisphere is weeks and months away. Value is defined when a product can be purchased at a price lower than it costs to produce.
One might say the world’s been turned upside down since COVID in 2020. Yet from the perspective of U.S. production, the start of supply reductions really began in 2019 when an abnormally cold and wet spring pushed crops behind schedule. A shrinking crop was noted moving into 2020 when COVID hit, and supply disruptions followed. Availability of inputs, or lack thereof, came into question. Additionally, light test weight from 2019’s corn crop surfaced on quarterly stocks reports affirming strong cash prices and tightening supply. After a 2022 drought in Brazil, which sharply reduced the soybean crop at the same time the war in Ukraine erupted, concern about food supply, and availability pushed futures and cash prices to 10-year high levels. This past fall, prices peaked after rallying from a mid-summer sell-off only to start a longer-term trend of lower prices until this past week. Futures and cash have moved to a level low enough that farmer selling will likely be slow unless there is a price recovery. Most farmers feel comfortable with crop insurance as a safety net, so the need to sell at lower prices is not present.
As June approaches and forecasters ramp up predictions for summer weather along with how an El Nino weather pattern might look, so too will price volatility increase. Talk of things like flash drought or pockets of extreme heat may also provide reason for traders to be active. As producers prepare to sell on price rallies, it may wise to execute strategies to retain ownership. End users should be prepared to cover needs whether on paper or physical. With higher interest rates this year, using leveraged paper strategies (call options) may be attractive where risk is quantified for the buyer to premium, commission, and fees paid. Strategically aiming for a balanced approach, whether an end user or producer, makes sense moving into a time of year where market sentiment and prices can change nearly instantly. Take time to pre-plan and implement strategy for any direction prices take.
Editor’s Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.
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Bryan Doherty