| November 19, 2010 | Archived Issues |
The USDA's November 9, 2010, supply/demand projections confirmed trade expectations of tighter corn 2010-11 carryover. They projected strong corn demand that will use up more corn than was produced in 2010. The 2010-11 corn projected ending stocks are only 827 million bushels, the lowest since 1995-96. World coarse grain use is also expected to exceed production, which will tighten global grain carryovers. The USDA's projections provided a bullish surprise for soybeans with lower soybean production and ending stocks than most analysts expected. Projected 2010-11 soybean carryover was sharply reduced to 185 million bushels, based on strong demand and somewhat lower production than previously expected. Although wheat carryovers remain adequate, foreign crop problems have resulted in a situation where global use will exceed production and begin to tighten world wheat supplies. More production will be needed in 2011 and the markets are expected to "bid for acres." The question is how much can corn, soybean and wheat acres increase? High cotton prices will add acreage competition from cotton as well. With limited additional cropland acres it could be difficult to build grain/oilseed stocks.
Following the USDA reports, corn and soybean futures opened sharply higher with soybean prices as much as limit up during the trading day. The bullish news seemed to point toward higher prices and many were counting on $6 plus corn and "beans in the teens." However, after posting new highs above $6, December '10 corn futures prices slipped lower and closed lower than the previous day's trading range forming a technical key reversal chart formation. The bullish news helped support soybean futures prices above $13 for a few days. But corn and soybean prices, along with wheat prices, have turned sharply lower in since the USDA projections were released. Failure of the markets to sustain higher prices following what was generally considered bullish supply/demand news is a negative market signal!
Does the price decline mean that prices had gone too high? Some analysts say maybe and believe that slowing of demand was beginning to occur in corn export and feed use as prices approached $6. The USDA's forecast 2010-11 price ranges are from $4.80 to $5.60 for corn and soybean prices from $10.70 to $12.20. Futures prices exceeded these ranges before the past week's decline, which put futures prices back within the forecast ranges.
A number of other factors could cause or have already contributed to lower prices. Growing Chinese demand has been a huge factor in the soybean market and rumors that they may import corn caused additional excitement. But recent reports that the Chinese will attempt to slow their economic growth with higher interest rates or price controls could have significant
market impact if this slows their imports. Recent strength in the value of the dollar and concern about European economies has been cited as contributing to weaker commodity prices. Weaker energy futures prices in recent trading days added to downward price pressure in other commodities. Uncertainty about the renewal of ethanol tax credits and tariffs raises additional demand concerns if corn for ethanol use slows. Liquidation of fund trader's long positions is also credited for contributing to recent futures price declines and negative technical market signals discourage speculators from re-entering the markets on the long side.
Market response to changing news has resulted in considerable price volatility. Any of a number of market factors can turn prices higher one day or result in a price decline the next day. Limit or near limit futures price moves have occurred frequently. From the price highs to the lows since the November USDA supply/demand projection, nearby corn futures prices have had a range of $0.79 per bushel. Soybean futures prices have ranged $1.40 per bushel and SRW wheat futures prices $1.35. This has occurred in just over a week of trading! This represents significant market risk on a day-to-day basis.
Expect market risk, uncertainty and price volatility to continue. All of the previously mentioned bullish and bearish factors will likely continue to influence prices. Weather, of course, always provides uncertainty. The first concern will likely be the effects of La Nina on Southern Hemisphere crops. Good weather in South America would help maintain adequate global grain/oilseed supplies and pressure prices. Poor weather would add to supply worries and send prices sharply higher. As spring arrives, weather uncertainty will shift to the 2011 US crops. Strong demand continues to support market prices, but any unexpected economic disruptions or slowing of use could result in sharp price declines. This makes it a risky and confusing market situation. Potential for higher prices continues to exist, especially after the New Year. At the same time, at these price levels, there is also downside risk in markets that have recently exhibited negative technical market signals.
So, are prices high enough? Will they go higher? Or are they ready to collapse? No one really knows. Most analysts would not predict a collapse due to the tightening of carryovers, strong demand, production concerns and uncertainty in non-agricultural markets. However, from current price levels corn, soybean and wheat prices could move higher or lower. Recent volatility suggests that these moves could be substantial.
The markets have offered profitable pricing opportunities. Historically $5 corn prices and soybean prices near $12 are good prices. Are prices high enough to make sales? This is the question that producers must answer for themselves or choose a market advisor whose decisions they are willing to accept. Other difficult marketing decisions are how much of
remaining old crop supplies should be sold and how to make the sales. When to start or add to sales for 2011 production should also be considered. These are not easy decisions.
In marketing there are no guarantees. However, some guidelines to consider are that it is usually a good time to sell when:
- Prices are near historic highs or current year futures contract highs
- Prices are at or above projected price ranges for the marketing year
- Upside price potential appears limited
- There is downside price risk
- The seasonal trend is for lower prices
- Basis has strengthened
- Prices generate a favorable return
- Market carry does not offer storage returns
Most of these can be answered with a yes. Current prices may or may not be near the eventual market high, but they are high enough to at least consider adding to sales.