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Wild markets try to be rational

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Volatility swings mask a return to fundamentals, mostly.

Wild swings seem like the rule rather than the exception these days in everything from stocks to soybeans. But after turmoil caused by trade wars and a pandemic, rationality actually appears to be returning to many key markets farmers depend on.

Supply and demand were largely thrown out the window as traders grappled with multiple black swan events. Now the dust is settling, finally, and many contracts seem fairly valued.

That doesn’t mean volatility is gone, not by a longshot. Uncertainty over the omicron variant and fears of tightening at the Federal Reserve due to inflation roiled markets last week. But the models I use to forecast futures are starting to make sense again for the most part. So here’s a look at what the math is saying for corn, soybeans, interest rates, crude oil, the dollar, the stock market and fertilizer.

Crops: Fair may not be friendly

Traders aren’t looking for big changes Dec. 9 when USDA updates its World Agricultural Supply and Demand Estimates. Ultimately, I think corn ending stocks could be 150 million bushels higher that the government currently forecasts due to weaker demand. Still, my model puts the average nearby futures price for corn at $5.58, a little stronger than the $5.45 average since the 2021 marketing year began Sept. 1.

Nearby December hit $5.89 before Thanksgiving, halfway into my projected selling range of $5.60 to $6.20. While that could leave some upside, it could also open the door to lower prices if the market can’t hold.

Given the government's current soybean outlook, my projected average futures price is $12.43, close to the average of $12.52 one quarter into the marketing year. Though USDA may wait until January before making big changes to its balance sheet, soybean ending stocks also appear to be headed higher due to faltering exports, which could limit my forecasted selling range to $12.51 to $13.49. The nearby futures high since Sept. 1 is $13.08, also halfway into that range, raising risk if demand does wind up weaker than forecast.

Fertilizer: Too much noise

Forecasting fertilizer prices based on supply and demand faces a basic dilemma. Not only is the industry famously non-transparent, but unlike most other commodities, trade policies continue to roil markets suffering from supply chain disruptions.

There was a little good news for growers last week. Urea prices softened by $35 a ton at the Gulf, and also broke from the Middle East to South America. Nearby UAN held steady though deferreds were also a little weaker as the U.S. finalized initial duties on imports from Russian and Trinidad and Tobago for unfairly subsidizing exports to the U.S. Though the penalties of around 2% to 10% were less than expected, additional tariffs could be added when the Commerce Department investigation is completed early in 2022.

The U.S. and its allies also added sanctions against Belarus and its potash exporting industry, though the order gives U.S. companies 120 days to wrap up deals with the big fertilizer supplier, which could ease the impact of the move on spring planting needs. Still, potash is far from a free market, with a few big exporting countries controlling supply.

Russia, another big potash exporter, meanwhile announced export limits on nitrogen products. While the list would curtail UAN shipments, urea and ammonium nitrate quotas were set at normal levels. This could mute the impact of the restrictions as the industry waits for news of the latest big tender from India, which could come this week. Chinese restrictions on urea and phosphates also remain in place, with other countries also looking at quotas to make sure their farmers have access to supplies.

Retail prices remain near record levels, but dealers aren’t guilty of price gauging. Offer sheets for the most part just reflect what’s going on in the international market farm suppliers buy from.

Crude oil makes sense

The energy market was on a roll this fall – until it wasn’t. Crude oil futures hit $85 a barrel in October, then broke hard after Thanksgiving, slumping below $63 last week before closing at $66.26. OPEC and its allies agreed to boost production a little and the U.S. and other importers released reserves onto a market threatened by the omicron variant.

Crude futures, which briefly traded in negative territory during the depths of the pandemic, have returned to normal, though volatility spiked to 70% on last week’s turmoil. Friday’s close was close to current fair value based on global economics and other fundamentals.

That wild ride may not be over if history is a guide. My average crude price for 2022 is $65.75, but the market could range from $38 to $93 depending on the flow of events.

Diesel remains expensive, but futures closed last week just under $2.10, in line with my model’s fair value projection. Futures hit $2.60 on the rally, a dime above my projected high, with the projected low for the year forecast around $1.70, a level last seen in March.

Midwest cash wholesale bench markets are trading five to seven cents below futures, starting to show typical seasonal weakness that often makes December and January good times to book spring fuel needs.

Interest rates hike ahead

The Federal Reserve isn’t expected to raise its primary interest rate for the first time since the pandemic at the conclusion of its last two-day meeting on monetary policy Dec. 15. But the central bank may accelerate tapering of credit instruments purchased to keep long-term rates under control.

That would give the Fed room to begin raising rates sooner if fears of inflation prove correct.

Indeed, betting on Federal Funds futures sees three or more quarter-point hikes to short-term rates as likely over the next year.

The most recent Consumer Price Index reading of 6.2% supports higher yields on the key 10-Year Note, which many lenders use as a benchmark on loans, with my model putting that rate at 1.78%. Notes looked like that were set to take a run at that level before the Thanksgiving breakdown, pulling back last week to 1.35%.

Higher short-term rates should lift the back end of the Treasury yield curve some, but the spread could also begin to flatten, at least modestly. Plenty of unknowns remain, including inflation and the size of the government deficit. Watch the CPI reading for November out Friday for clues after last week’s employment report, with the trade expecting a reading of 6.8%.

The dollar stays stronger

Currency values follow interest rates, favoring countries that offer a higher risk-free investment. As a result, the dollar’s strength this year is hardly an outlier. The index against major currencies hit a 16-month high before Thanksgiving, then pulled back to 96 at the end of last week.

That looks a little stronger than my models currently point to – they’re forecasting 94.72 in a range from 90.33 to 99.12, not too far from the trading band this year.

Contrary to popular belief, a stronger dollar doesn’t discourage exports of U.S. farm goods. But a stronger currency does tend to deflate the value of dollar-denominated commodities like crude oil and grain. Swings in the greenback can be a tip-off to the direction of prices as a result.

Stock market faces risk

Wall Street led markets of all stripes lower during the depths of the pandemic, but quickly recovered, posting new record highs on a regular basis. The S&P 500 Index notched a couple closes above 4,700 in November before inflation and omicron jitters triggered selling.

For months investors appeared to be buying stocks not for current value, but for what they would be worth when the economy completely recovered from the pandemic. But the market looks pricey, even based on projected 2022 earnings. That 4,700 level is the ceiling of my model’s current range for stocks, so rallies will need either a change in the data or what used to be called “irrational exuberance.”

Knorr writes from Chicago, Ill. Email him at

The opinions of the author are not necessarily those of Farm Futures or Farm Progress. 

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