TFM Perspective 11-11-2022


Bull Markets: Long Tail?

When thinking about stored corn, soybeans, and wheat, as well as the upcoming year’s crops, it is important to note that prices reached decade-high levels in 2022. Increased demand, supply disruptions, and speculative buying (as measured by the Commodity Futures Trading Commission) were all factors driving prices higher. The market’s job is to determine a fair price for a commodity. This view changes daily and is represented through trade at exchanges throughout the world. Some bull markets have a gradual uptrend for price over time (think real estate). Commodity bull markets often occur in short time periods and are usually driven by supply disruptions after periods of lower prices. Demand usually grows in these low-priced windows. Once a supply disruption occurs, prices move quickly to a point of reducing demand. In 2012, a drought-shortened crop season, December corn futures rallied from mid-June to mid-August, moving well over $3.00. After that, a long period of declining prices occurred, lasting several years.

The past couple of years have been witness to many variables that might be considered out of the ordinary. A war in Ukraine sent wheat prices skyrocketing, doubling in price. At the same time, a drought-shortened Brazil soybean crop in 2022 and a struggling U.S. corn crop all added up to tight world inventories. Prices have reflected these concerns and are holding at historically high levels. Yet, contract-high prices were established several months ago. Uncertainty surrounds the fertilizer industry, and it seems supply disruptions loom on the horizon daily. All these variables suggest prices should hold or move higher. History also suggests that high prices tend to cure high prices. Often, bullish fundamentals (tight supply and strong demand) are prevalent at high prices. With high prices, consumers reduce consumption. At the same time, producers figure out ways to produce more.

Prices are poised to move higher, especially if weather conditions affect row crop production. In fact, it might be argued that supplies may need to be rationed. Yet, if supply disruptions are minimal and weather is cooperative for production, higher-priced futures could gradually work lower over time, as price reflects less and less uncertainty and increased crop production confidence.

To prepare for both scenarios, strategize so you have confidence to manage prices no matter the direction they move. Review cash contract offerings as well as using futures and options to offset risk and take advantage of opportunities. With hindsight, it is easy to see what decisions should have been made. Making marketing decisions in front of future price activity is a challenge. Recognize that doing nothing is a decision that may include the most risk. Talk to a professional to help you sort out what is best for your situation. Understand the risks and rewards of any strategy before you implement. With harvest winding down, take time now to set a strategy in motion.

If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.


Bryan Doherty

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