Corn transitioned from bull market to bear market in 2023. Beginning stocks for the 2021/22, 2022/23, and 2023/24 marketing years all fell within a tight range from as low as 1.235 billion bushels to as high as 1.377 billion bushels. We are now projected to start the 2024/25 marketing year with beginning stocks of 2.131 billion bushels, roughly 800 million bushels above the previous three marketing years.

Since January 2021, not a single monthly settlement for front-month corn futures has been below $5 per bushel until July of this year. And since July of this year, not a single monthly settlement for front-month corn futures has been above $5 per bushel.

As we think back to the transitionary nature of 2023, it is important to consider the obstacles that bear markets offer and why a bear market will punish you for indecision. The most obvious obstacle for a grain grower in a bear market is the propensity for values to move lower as time goes by. There is such a thing as a bear market rally, and you will need to take advantage of them when they appear seasonally. However, bear markets all have one thing in common, which is price moving from the upper left to lower right on the chart. A bull market will reward you for indecision, carrying old crop into the next marketing year for example. However, a bear market will make you wish you had a time machine to go back a few weeks or months to make that sale you just couldn’t pull the trigger on.

Consider the market structure

Bull markets also have a different structure than bear markets. When a market is trending higher, it is not uncommon for the futures market to become inverted where front-month futures trade at values higher than the deferred contracts. This structure allows you to spot sell grain at the highest price available, while also offering the opportunity to re-own those sales, if you desire, in a deferred contract at a lower price.

A bear market will often have the opposite structure where deferred contracts are trading at a premium to nearby contracts, commonly known as a carry market. Unfortunately, the nature of a bear market will see one contract expire and the next contract eventually work itself down to where the previous contract left the board. We saw this in 2023 with September futures expiring at $4.625 on Sept. 14, just to have the December contract move from $4.805 on Sept. 14 to $4.5675 on its expiration day, Dec. 14.

A carry market is only good for a producer if you are short the carry, or in other words you have a short position in that deferred contract at the higher price. It is not telling you prices will be higher down the road.

It also makes the proposition of re-ownership difficult. Who wants to sell corn at Thanksgiving for $4.65 and then re-own it basis July futures at $5.05? That’s not a good idea.

A carry market can be a detriment to the producer if managed incorrectly. A primary example of this is seen with basis contracts. Your cash price has two components, the futures value, and your local basis. If basis looks attractive for a future delivery period, you can lock in that basis with a basis contract. But remember that once you do, you put yourself on the clock to set the futures price before that futures contract reaches First Notice Day.

Watch your basis

But as we already discussed, the typical behavior in a bear market is for price to move lower over time which often leads to that futures price not being set before First Notice Day. At this point a decision needs to be made. Either accept the futures price, which likely went down into delivery, or roll that basis contract to the next month and hope a rally materializes.

In that situation, now you’re hoping the market will rally back to where you could have sold the previous contract. If you, for example, locked in a basis of 10 cents under the December futures and waited to roll that to March the day before First Notice Day, your basis now is 36 cents under the March contract. Do this a couple more times and before you know if you’re looking at 60 cents under the July contract. Did the futures market rally 50 cents just to offset that change in basis? Not likely, since it is a bear market after all.

This is a bear market we haven’t seen in quite some time, one with higher interest rates. So instead of selling grain and paying down the operating note, reducing interest cost, and potentially earning 5% on excess cash in a money market account, a decent basis level was rolled into a garbage basis level and interest was paid for months just to get a lower futures price.

Bear markets punish indecision.

Feel free to contact me directly at 815-665-0463 or anyone on the AgMarket.Net team at 844-4AGMRKT for assistance. We are here to help.

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