Seismic Shift

What’s Happened…

The last several weeks saw massive selling pressure in the corn, soybean, and wheat markets. After rallying for multiple months, prices peaked in early May and began to slip. Rapid planting progress for corn and soybeans this spring, along with an impending wheat harvest, added to price pressure. This created an environment where traders were quick to exit long positions once prices began to slide. Other technical indicators (such as moving averages and overbought conditions) also initiated new selling or exiting positions, adding to price pressure.  

December corn futures, after trading above $5, quickly gave up 10% of their value and are currently trading under $4.50. November soybeans peaked at over $12.00 and are now trading under $11.50. Old crop values suffered greater losses as the market took the view there is little reason to ration inventory. For wheat, despite production forecast to be the lowest in over 50 years, futures gave up more than 15%. Managed money leaving the market played a big role.

Why this is Important…

In a previous Perspective, we identified the importance of knowing who is in the market. Managed money (made up of large speculators) was building the largest net long positions for corn, soybeans, and wheat over the last five years into early May. This data is released each Friday by the Commodity Futures Trading Commission (CFTC).   

The good news is that the report can provide an opportunity for farmers to sell on a price rally. The potential bad news is that, once prices begin to drop, there could be a significant exodus of long positions over a short period of time and consequently a sharp decline in price. That is what happened this year. After being long hundreds of thousands of contracts, most managed money traders are now likely out of long positions and could be switching to sell positions (short). A price decline can come fast. For farmers making marketing decisions, this environment is akin to trying to catch a falling knife. 

What can you do about it?

Keeping aware of the buildup in long positions and time of year are critical. When mid-May rolled around and the forecast improved for Midwest rain coupled with planting progress ahead of the 5-year average, bullish support was evaporating. In addition, traders may have also been buying in front of trade negotiations with China. While a deal was reportedly struck, no tangible buys from China emerged. In other words, the market appeared to buy the rumor and sell the fact. 

Awareness and strategy are paramount in this environment. Strategic tools such as forward contracting or using sell stops as trigger points to hedge futures or purchase options are intentional strategies that can be implemented in a price rally. In mere weeks, the seismic shift in managed money, combined with shifting fundamentals and negative technicals, quickly shifted prices from bull to bear.  

Find out what works for you… 

Work with a professional to find the strategy or strategies that are best suited for your operation. Communication is important. Ask critical questions and garner a full comprehension of consequences and potential rewards before executing. The idea is to make good decisions for the operation and less emotionally–charged responses to market moves, which are always dynamic.   

About the Author: With the wisdom of over 36 years at Total Farm Marketing and 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 markets and marketing tools, an excellent listener, and communicates with intent and clarity to ensure clients are comfortable with their 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.

Author

Bryan Doherty