TOP FARMER WEEKLY PERSPECTIVE 9/18/20 BY BRYAN DOHERTY

Supply, Demand, or Otherwise

On Friday, September 11, the USDA released its monthly Supply and Demand report. Per usual, the report had lots of numbers to decipher. In the end, the market seemed content with no negative surprises. The report was not considered friendly for corn or soybeans, yet prices still held steady (corn) or moved higher (soybeans) after the data was released. This was impressive for two reasons. First, corn rallied 45 cents and soybeans over a dollar prior to the report. Therefore, a negative report for either might have sent prices tumbling. The second reason is because harvest season is here, and more supply will be available to the market as farmers hit the field in a major way, increasing near-term supply availability. The market ignored this as well.

Some analysts will look at the supply side of the equation when it comes to trying to determine price direction. Others may take an opposing view, analyzing demand. Usually analysis is a combination of the two. Strong demand and decreasing supplies were the case from early August, when hot and dry conditions, coupled with high winds in Iowa, created an expectation that supply would be smaller than the previous month. And at the same time, strong buying interest from China developed, providing bullish traders with plenty of reason to buy. In this environment, where both supply and demand are favorable for price support, sellers can become less aggressive. This, in turn, may reduce downward price pressure. These are logical explanations for the way the market responded to reports that were, for the most part, neutral.

There may be, however, something more to this year’s markets which may suggest recent price rallies fall into an “otherwise” category. When the August 12 Supply and Demand report was released, the numbers for both corn and soybeans were not, on the surface, price friendly. Still, prices failed to move lower. We concluded both farmers and speculators had little interest in selling. Dry conditions were really beginning to show on drought maps. Lack of selling interest alone should not be enough to drive prices higher. There may be something larger at hand.  A report titled Commitment of Traders, released each Friday, reflects large players in futures and options through the previous Tuesday. The report indicates how many commercial and speculative participants are in the market. Commercials are generally those who buy and sell the actual inventory, while large speculators, often termed managed money, trade to gain value on their investment. The big change in August and early September was in large speculative positions. Managed money was short corn by nearly 200,000 contracts in early August and is now estimated long near 50,000 contracts, an impressive turnover, considering this year’s crop may, despite challenges, be record large. Managed money was estimated long near 50,000 contracts of soybeans in late July. The latest estimate is now near 200,000 long.

Is there rational behind managed money recently flipping positions in corn and now aggressively long soybeans? It’s all about China. The perception (likely true) that China is running tight on corn inventory, while at the same time needs a significant influx of protein products, has created an environment where managed money wants to own both commodities. August weather was the signal to investors to reverse course.  It may also have been the tipping point for China to step up and buy U.S. products. A recent report suggesting the hog herd in China is growing at a more robust pace than originally thought and a downgrade to their corn crop are also fundamental reasons supporting prices. The rally in both corn and soybeans is reflective of supply, demand, and managed money factors contributing to solid price support and higher prices. Keep in mind these factors can change quickly. Corn and soybean farmers should be having meaningful conversations with their advisors regarding strategies for future price movement.If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-top-farm, extension 444.

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.

Author

Kelly Rubisch