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Corn+Soybean Digest

How Fast Things can Change

Markets change. Fundamentals change. The facts change. But people never do. The majority of the public still gets bullish at tops and bearish at bottoms — been that way all my life.

But the biggest problems many producers are struggling with right now are adjusting from an inflationary environment to a deflationary one. Some believe that because of the sharp increase in money supply and the huge government deficit, that the end result will be inflationary. Maybe several years down the road that will be the case, but in the near term it will not.

Why? The Obama administration has changed the rules of the game, and as a result banks have tightened up considerably on credit. Thus, no matter how big the pile of money is, if the average person has lost borrowing power, the size means nothing.

In the last two months soybean prices have declined by nearly $2/bu. and corn prices have declined by nearly $1.50/bu. The shift from a bull to bear market has been propelled by several factors, one of which is a large corn crop coming, and what would appear to be a large soybean crop.

But even more important than those two factors is a topic I have discussed in this column several times over the last three years: the impact of index funds (long-only funds).

IF YOU RECALL from over a year ago I was arguing strongly that the impact of index funds was a double-edged sword. For reasons I won't go into here, the Commodity Futures Trading Commission (CFTC) had allowed an exemption to these funds to trade in positions much larger than normal limits.

For example, the speculative limit in corn is 110 million bushels, and at the top of the market in June 2008, our estimate is that the largest index fund owned 1.4 billion bushels of corn futures by themselves.

This excessive amount of money flowing into the index funds caused an enormous explosion to the upside in grain prices as well as energy prices, fooling the public into thinking that the rise in prices was based on demand only. Not the case.

Now the the CFTC will likely make a decision by year end to curtail the position size of index funds — which will be bearish in the market.

The index funds caused the commodity prices to go too high in 2008, and my estimate is they will cause commodity prices to go too low in 2009.


No matter what the reason, it's important to recognize that the grains have now shifted into a long-term bear market. Strategies that worked throughout 2008 will not work in the next couple of years. Markets like these create more opportunities than bull markets. Why? In bull markets almost everyone is gaining the same. And in markets we're witnessing now, aggressive farmers with good marketing plans, will be profiting a lot more relative to their neighbor who is doing nothing.

There will be train wrecks this coming year as some producers bought inputs already for next spring and have sold little or no grain. My belief is that will turn out to be the wrong way to “leg into” the profit equation.

As we move ahead, remember to compare today's prices to where you think the market is headed — not where it has been. These are going to be difficult decision-making times and it's more important than ever to manage your risk in this environment.

Richard Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. Fora trial subscription and information on Brock services, call 800-558-3431 or visit

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