At the beginning of the year, this column laid out the anticipated bearish forces that the market would be dealing with through spring. What we didn’t know at the time was that a global pandemic would worsen those negative market forces and add additional pressure to prices from lost demand as global and domestic energy consumption was impacted.
Now, over the last couple months, our focus has been more about what conditions we would need to see to suggest bottoms are being made and why the trend of lower prices was likely to be bucked, at least for a short period of time.
Two steps forward, one step back
Recent charts appear to be in “two steps forward, one step back” mode as we continue to build a base of support. The July Corn contract has a double bottom at $3.09 on its chart and has managed to trend slightly higher at the same time the USDA has shown increasing carryout levels.
The fact that the market has stopped making new lows on bad news suggests short term lows have been made and higher prices are in order.
Meanwhile, Soybean futures managed to close above resistance last week, retested and held those levels heading into this week’s WASDE report and then finished the week near the highs. Any continued strength next week will push soybean futures through the 100-day moving average; the last time July futures traded above the 100-DMA was 1/21/2020 and a breach above it would likely cause additional technical buying.
Weather disturbance impact
Soybeans also appear to have the best chance of having a meaningful impact on the balance sheet with a weather disturbance. Without changing demand assumptions or planted acres, it would take a yield reduction of just over one bushel per acre to cause a 25% reduction to expected new crop soybean ending stocks; a two bushel per acre yield loss would cause expected stocks to be cut nearly in half. Both scenarios would require higher prices to ration demand.
It was reported this week that Brazil has already sold 87.5% of its recent soybean harvest. That would suggest the country won’t be there to aggressively sell into a summer rally unless it is selling its new crop, planted this fall.
Demand adjustments have been made to the balance sheets to account for the impact of COVID-19. Now we find ourselves with a large short position held by managed money in corn, and a slightly long managed money position in soybeans as we head into the most influential timeframe for yields.
Based on the conditions we thought would warrant forming a short term low and the seasonal tendency to rally at this time of year, we expect short covering from the funds in corn, and the long position in soybeans to grow.
So, what do we expect if that’s what we’re expecting?
- Expect Soybeans to lead the agricultural complex higher.
- Expect Corn to struggle to rally significantly without a severe weather event.
- Expect volatility to increase in the futures market, which will increase emotion.
- Expect your decision-making to become more difficult if you don’t have a plan.
- Expect yourself to feel bullish when you should probably be selling.
- Expect the window to do your most substantial summer marketing to be less than two weeks.
- Expect the funds to trim their short position in corn, but not go long.
- Expect to market corn off Dec while looking to capture carry this fall on stored bushels.
- Expect to market cash soybeans off Nov with intent to re-own deferred contracts at a discount.
- Expect the unexpected and use options to cover major decisions.