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Why grain market volatility could work in your favor

This market will give us challenges and opportunities by year-end.

I think for a great many of us, 2020 cannot end soon enough as the hits keep coming. 

For those involved in trading commodities, I recommend buckling up as volatility and uncertainty looks to be building into the end of the year. That will create both challenges and opportunities. 

On the volatility front, after watching crude trade negative earlier in the year, it seems anything is possible. The silver market, which traditionally moves cents per day, has been moving dollars per day.  On August 8th, the September COMEX Silver contract traded just shy of what equates to a $25,000 trading range, from low of session to high of session. Gold had a $127.80 range the same day while typical moves are $20 from low of session to high of session.

Grain’s uncertainties

The grain markets look like they will be dealing with their own uncertainties this fall, which could keep trade action volatile.

On the supply side, USDA estimated the national corn yield at 181.8 ba, which was a 3.3 b/a upward revision from its July estimate. The data that the assessment was drawn from came before the devastating derecho hit Iowa, which means we can pretty much throw this estimate out the window. Reports suggest that 10 million acres of Iowa farm ground was affected by the storm resulting in estimated production losses of anywhere between 100 million bushels to 400 million bushels.

It is going to take time to learn the real loss, so the supply side of the table will be hard to nail down for months.

On the demand front there are also many unanswered questions. The big three – trade, ethanol and feed – are all uncertain.

  • Trade: China has been a big corn buyer recently, but will it continue? With the political rhetoric likely to increase as we get closer to the presidential election, odds are that talk of less buying or even cancellations by the Chinese will happen. USDA is currently estimating corn exports to increase 430 million bushels year over year, partially due to China's demand.
  • Ethanol: USDA anticipates corn grind for ethanol will increase by 350 million bushels year over year. This looks like a stretch since all indications suggest we could be dealing with the ramifications of COVID-19 for at least the next six months or more.
  • Feed/Residuals: Demand is anticipated to be up 325 million bushels year over year despite the economic hit the livestock sector has taken, so this number could easily be overstated as well.

In the big picture we would not be surprised if the crop gets smaller, but offsetting the lost bushels will be a cut in the 1.105 billion bushels of extra demand year over year.  

Record soybean yields

USDA stated the national soybean yield at a record 53.3 bu with nine states anticipating record yields. With the last half of August forecasted to be cool but dry, some in the trade are rightly skeptical if the current yield estimate will hold.  

Early signs of La Nina could also affect South American crops, especially if dryness persists in Argentina over the next month. 

With soybean exports anticipated to grow 475 million bushels year over year due to Chinese buying, any political rhetoric that causes the Chinese to walk away from the Phase 1 trade deal could have an adverse effect on export demand.

2020 has been a challenging year, and unfortunately it is likely to remain challenging. We encourage the use of options to control risk. Consider serial and shorted dated options for grains as a way to reduce cost.

Contact McCormick directly at 815-665-046 or anyone on the AgMarket.Net team at 844-4AGMRKT.

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