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Here’s what you should do about volatile markets

Commodity Super Cycle, tight stocks could result in $6 corn, $18 soybeans.

Bill Biedermann, Hedging strategist

February 26, 2021

5 Min Read

I watch Bloomberg News a lot so that I know what New York money is interested in. As vaccinations are administered in hopes of a revival in the economy, guests on these shows are talking about a super cycle in the commodity world.

The agricultural community is due for a super cycle. History tells us that four to six years of cheap sideways consolidation builds demand and is usually followed by a two- to four-year rally in markets. Technical traders often identify this four to six year consolidation as a “rounded bottom.” These are rare and very powerful technical formations when they begin to break out.

Fundamentally, since the U.S. reduced tariffs, we have seen massive demand growth. This could fuel a multi-year rally based on historical evidence of a demand shift.

We are, however, entering a seasonal time where Brazilian exports pick up. That creates more competition for U.S. markets and usually causes our prices to flatten out for a while.

Why these higher prices are justified

U.S. corn stocks-to-use ration have only been this low about four times in history. World corn stocks-to-use ratios, excluding China, have only been this low three times in history. Additionally, stocks do not change too much when you forecast 92.25 million acres in 2021 and a normal yield.

So what does that mean if we don’t have ‘normal’ yields?

Stocks will tighten. If we look at history going back to 1970, we can highlight the moves that occurred in similar years. If the 2021 nearby futures follow the type of rallies seen historically, we could expect corn to trade above $6 and if U.S. weather becomes adverse, then prices could challenge the historical high.

U.S. soybean stocks-to-use ratios have historically never been this low. And based on current usage and shipping rates, we would expect stocks to tighten even further unless we see over 30 million bushels of export cancellations. However, there have been four times in history where stocks-to-use ratios fell sharply.

World soybean stocks have dropped 29.5 million metric tons in just two years, or about 30%. Stocks-to-use ratios remain at comfortable levels, but this type of decline has occurred two times. Using these analog years as a guide, nearby futures should at least reach the $15 area.

There is a fair chance to see prices reach the average of this study, which puts prices in the mid $18 range. Adverse weather in the United States with no more than 91 million acres, would imply new historical highs.

The take away

A super cycle in commodities is a possibility. We might be looking at a potential perfect storm. Both domestic and international fiscal policy is intended to inflate the economy. The UN’s FAO recently reported world cereal prices hit 124.2,  +7.1% from December and +42.3% from year ago levels. The all food price index hit the highest price since July 2014.

Add to this the risk of reduced U.S. stocks unless acreage or yield exceeds expectations, the fact that the CME and CFTC agreed to allow hedge funds to double their position limit which could result in  bigger price swings, and studies like the one we showed you where economic analog data suggest prices are still well below economic value.  All of this could cause a lot of New York money to enter into commodities.

But, the timing is not right. Normally markets go sideways or lower in the next 4-8 weeks. Brazil this week floated 22 ships to China and there is always the potential for U.S. farmers to surprise the industry with how many acres they can plant. A big surprise would nearly kill any chance of a super cycle.  

What should you do now? Think long and hard how to manage risk and revenue in this environment. Selling too low could put you in a non-competitive position. Not taking advantage of very profitable prices could leave you vulnerable and even go broke if you were forced to sell at a significantly lower value. AgMarket.Net has been diligent in making sure producers have options strategies in place that secure profitable farming results while keeping the upside open on bushels sold. Our strategy is designed to be ready for the perfect storm. If you're not ready, feel free to call us. We would enjoy the opportunity to visit.

Click the download button below for more charts and graphics.

Reach Bill Biedermann at 815-893-7443 or [email protected]

The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. AgMarket.Net® is the Farm Division of John Stewart and Associates (JSA) based out of St Joe, MO and all futures and options trades are cleared through ADMIS in Chicago IL. This material has been prepared by an agent of JSA or a third party and is, or is in the nature of, a solicitation. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions.

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The opinions of the author are not necessarily those of Farm Futures or Farm Progress. 

About the Author(s)

Bill Biedermann

Hedging strategist, AgMarket.Net

Bill is a well-known speaker, presenter and commodities advisor. In addition to trading commodities for 40 years he has testified before Congressional hearings, CFTC hearings, served for the U.S. State Department AID and co-founded one of the largest IB Brokerage and Agricultural Economic Research firms in the U.S. Bill graduated from Illinois State University with majors in Agricultural Production, Ag Economics and Ag Education and farmed from 1973-1988.

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