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Commodity prices: Calm before the storm?

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Here’s what could spur price breakout in the weeks ahead.

If you have been watching grain trade for the past two months, prices overall have been relatively quiet, compared to the volatility seen earlier in the summer. One thing history has taught me, is that the longer a market trades sideways, or in a consolidation pattern, the bigger the price breakout move may likely be in the near future. Let’s take a closer look at why the markets are quiet now, and what could spur prices in the weeks ahead:

Traders quiet for now

No doubt about it, traders are mostly on the sidelines. After the dramatic whipsaw price action that many commodities saw during May and June, some traders seem to be content to take a breath, and “wait and see.” Higher initial margin requirements, limit up and limit down days, paying margin calls, and bigger price moves thanks to larger daily price limits wrecked the nerves of some of the most seasoned traders.

When looking at the grain markets, there is uncertainty regarding old crop ending stocks, yield of the crop being harvested, and uncertainty regarding future demand. The Sept. 30 USDA Quarterly Stocks report shed light on old crop ending stocks, and the bottom line is that supplies look to be snug heading into 2023. And as harvest begins, early yield results have been mixed throughout the Midwest.

In coming weeks I have a sneaking suspicion that traders and the funds will come back into the marketplace in droves, as commodity fundamentals will become a bit more “known” versus the floundering price and fundamental action as of late.

Upcoming USDA report

The next USDA report is already sneaking up on us – next week, Oct. 12. There are plenty of questions as to exactly where the yield on this crop will end up. What will USDA print on this report? Will they “punt” and leave yield unchanged until the November report?

Regarding soybeans, if yield is estimated to be less than 50 bu. per acre (currently 50.5 on the September USDA report), that would be a reason to justify January 2022 soybean futures trading through $14 a bushel resistance, with an upward potential price target of $15 a bushel futures. However, if yield is increased, that might weigh on prices.

When looking at corn, USDA is currently using a potential national yield of 172.5 bushels per acre. The previous record was 176.6 bushels per acre back in 2017. The line in the sand for corn is 170 bushels per acre. If yield is perceived to be less than that, then that would justify price action for the December 2022 futures contract to trade above $7 a bushel.

Weather top of mind

Weather is also top of mind for traders as the Midwest continues to be on the dry side, which is affecting barge traffic on the Mississippi River. The river traffic is at a halt down south due to low water levels. Weather is also top of mind as this year’s harvest is not off to an exceedingly fast pace as the crop does not seem to be “finishing” as quickly as some hoped.

Weather watchers are also monitoring dry conditions in Argentina and Brazil as they begin planting their corn and soybean crops.

U.S. dollar and exports

Besides yield, we need to also monitor demand for grain. One very important demand category for agriculture is the export markets. That means the value of the dollar also needs to be monitored. When the value of the dollar is lower, it makes it more attractive for other countries to import our grain commodities due to currency exchange rates. The U.S dollar index is near 20-year highs, and may be a factor with the recent slower export pace in corn.

Around the world, geo-political factors may come into play. On October 16, the 20th National Congress of the Chinese Communist Party (CCP) is set to occur. The week-long gathering that occurs every five years will determine China’s leadership for the next term, including the likely re-election of Xi Jinping to lead the CCP.

At this gathering Chinese leaders may also shed some light on strict Covid-19 lockdowns, their challenged economy, and struggling real estate market. The war continues in Ukraine, President Putin threatens new war tactics weekly, and now North Korea just launched two short-range ballistic missiles toward its eastern waters to add more drama to the mix.

October is set to be an exciting month for trade. A progressing harvest, weather watching, elections in China and a USDA WASDE report. You’ll be busy with harvest, but keep an eye on these factors. There is a big market move likely coming.

Reach Naomi Blohm: 800-334-9779 Twitter: @naomiblohm   and [email protected]

 

Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition.  Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation

 

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