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Don’t be hypnotized by high grain prices

fergregory/iStock/Getty Images Plus Pendulum used for hypnotism and readings swinging with motion blur
Upcoming report could put a cap on rally – or justify another leg up for prices. It’s time to manage your risk.

Still forging on, grain futures have been fueled with friendly fundamental news to keep prices chugging higher. The surprisingly friendly Quarterly Stocks report and strong export demand continues to fuel higher futures prices and stronger basis levels throughout many parts of the Midwest.

Trade now gears up for tomorrow’s USDA report. This report has the potential to put a lid on this recent rally, or be a fundamental justification for “another leg up” for grain prices. We know we can’t outguess USDA reports, or how the market will respond.

That’s why it’s time to scenario plan for whatever unfolds from the October 9th report.

What is already priced in and expected?

Looking at pre-report expectations, trade is expecting to see lower yield for corn and soybeans on the report. For corn, the average yield guesstimate is 177.7 bushels per acre versus 178.5 bpa announced in the September report. The soybean yield is expected to come in at 51.6 bushels per acre, down slightly from the September number of 51.9. Because of these lower yield expectations, ending stocks are also expected to be lower for the 2020-21 crop year.

Ending stocks for 2020-21 corn are expected to be near 2.113 billion bushels, down from 2.503 billion bushels in the September report. Ending stocks for soybeans are pegged at 369 million bushels, down from 460 million bushels in the September report. These values are already priced in to the market. Remember, the perception that ending stocks are getting smaller is the catalyst needed for prices to move higher. The above information is already priced into the market. In order for corn and soybean futures to trade dramatically higher, ending stocks for corn and soybeans would have to be well below the above pre-report estimates. 

It’s not just about yield

Demand for grain is also strong. Earlier this summer the Chinese buying had not occurred with the intensity of late. Low commodity prices, a lower U.S. Dollar, and the threat of smaller crops here in the U.S. and potentially in China provided incentive for China to be proactive in its buying needs.

U.S. export sales have been phenomenal, with many wondering if USDA will increase export demand in the upcoming report. Corn demand for export in September was announced at 2.325 billion bushels, increased from 2.225 from the August report.

Is another increase justified?

Soybean export demand in the September USDA report was pegged at 2.125 billion bushels, unchanged from the August number. Many feel this demand number may be increased as China continues to buy. Also, because the planting pace in South America is a bit slower than normal, that means they will not have very many early harvested beans available in January. That fact is also helping to keep the U.S. export buying at a swift pace.

Higher prices can hypnotize farmers

When visiting with producers about how to manage risk and capture opportunity from current markets, many are unsure of what to do. The hypnotic trance of higher prices sometimes compels producers to do nothing, and “wait and see.” The distraction of harvest, and working long days, adds to the haze. Tomorrow’s report may provide information that could justify corn futures to trade to $4.50 or soybeans futures to $11 per bu. But what if it doesn’t?

The funds are now near record long in soybean futures, and are likely long close to 200,000 contracts in corn. More legitimate bullish fundamental news is needed to justify another leg higher for prices. If that news is not delivered, a price washout could follow.

It has taken over five months to build this higher price in soybean futures, and nearly three months to build this higher corn price. Here’s something to think about despite your focus on harvest right now:

When beautiful gradual price rallies run out of steam on charts, prices have a tendency to cliff dive lower. And the free fall lower usually occurs over the course of a few weeks.

That’s when we hear, “I can’t make cash sales now, it’s a down day. I’ll just give it a day to see if price comes back up.”

There is potential risk to this market with lower prices, and there is the potential for reward with higher prices. You must manage both.

 

Reach Naomi Blohm: 800-334-9779 Twitter: @naomiblohm   and naomi@totalfarmmarketing.com
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. 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
The opinions of the author are not necessarily those of Farm Futures or Farm Progress. 
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