Grains moved sharply higher Wednesday after drifting lower in overnight markets. They are now retesting the long term downward trendline.
It is not often that we get a 20 cent move like this, especially with very little fundamental news. So what is the market telling us?
The market completely ran out of sellers today, which could signal the harvest lows are in. With corn harvest nearly 70% complete, farmers have likely delivered on their commitments and are looking to bin the rest. Markets may need to move higher to compel growers to reopen those bins. The next major hurdle will be breaking through the trendline resistance set around $5.63 in December.
We are still 75% unsold as we believe there is much more potential to the upside than downside. Farmer mentality has been such that “since we had such high prices last winter, that means we will have low prices next winter.” While that has been true in the past, we think this year will be different.
While there is still talk about USDA raising yields in the November report, the market knows this. This often means that if USDA raises yields to within expectations, it will already be priced into the market, leading to a buying opportunity. USDA would have to raise it to above expectations to continue downside pressure.
Of course, they could also leave yields unchanged, which could boost prices even further.
Acres maxed out
This year is also different, because, when we have had reduced inventory in the past with higher prices, we simply produced more to fill the gap, often with expanded acres. That is not expected to be the case this year as combined corn and soybean acres are maxed out around 183 million acres.
Wheat and Cotton acres are trading at multi-year highs and so are very competitive with corn and beans. Early estimates see corn acres down by 3 million acres next season despite strong prices. We will have to pay close attention to global production in other countries like Brazil who will look to fill the void left by U.S. production.
It is also important to keep a watchful eye on basis. Where we farm in Northwest Iowa, basis is already a nickel over Chicago for November delivery. Leading up to harvest it was 20 to 30 under Chicago and so the basis is telling us that even if the corn is there, buyers are having to up their bids if they are to get any of it.
We still see basis improving heading into spring, and so on that strategy alone it may be worth staying patient and remaining unsold.
We like selling into a rising market as opposed selling into a falling market. Hopefully today was the start of something. Keep in mind we have already rallied 57 cents since Oct. 13. The key will be to breaking above the downward trendline.
Looking ahead, prior resistance levels act as potential sales targets which would be $5.94, $6.11, $6.28 and $6.38.
Matthew Kruse is President of Commstock Investments. He can be reached at 712-227-1110.
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