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Price slides, panic: Are we nearing a bottom in grain markets?

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Keep your eye on U.S. dollar, energy, as they will likely help strengthen prices.

This week’s agricultural price slide into Tuesday morning was filled with elevated emotions and signs that negative factors may be peaking. Crude oil prices trading $40 into negative territory were the epitome of panic. Tuesday’s upside turnaround, followed by Wednesday’s strength in crude oil and corn, were further highlighted by strong spread performances.

All that has happened this week is a great sign that negativity may now be behind us.  
So…what might be ahead?
Let’s start by recognizing the significance of all that we have experienced in just the past several weeks:
1)
Global pandemic
2) Crude oil price war
3) U.S. and global economies literally shut-down
4) Backing up of crude oil, livestock, and grain inventories
5) Ethanol shuttered
It was impossible to anticipate all these things happening. Sure, it may have been possible to have been more aggressive making sales 30-40 cents ago in corn. It may have been possible to have been more aggressive dumping soybeans 50 cents ago. Yet, it remains very possible that even those sales could prove to be eclipsed in the months ahead.

Key industry players still fully expect China to honor Phase One. If true it could result in much higher prices. 
Even so, remember that there will always be projections of still lower values even when a bottom is established. We often establish bottoms amid massive market panic and discouragement. We have experienced a lot of that this week.
Potential energy bailout
It is very possible that the government is about to unveil a massive energy bailout program. There is justification for this, as the energy sector is a national strategic industry. President Trump has floated the idea of a massive tariff on imported crude oil. Such action would immediately push up domestic crude oil values to levels where companies can afford to keep the industry vibrant.

Such a bold energy plan would have direct implications for the ethanol industry as it would likely get direct infusion of support from an overall energy bailout.

This could be a game changer for all commodities.
Consumers and an end to lockdown
How fast the consumer returns to normal as the country opens back up will be key to the health of the U.S. economy. It is also important to remember that the U.S. and global economy will reopen with a backdrop of trillions and trillions of new funding. Ultimately
this will be inflationary, and it will weaken the U.S. Dollar. For all these reasons, sales of corn and soybeans at current prices may prove to be regretful. IF we see inflation build AND the U.S. Dollar weakens, all commodity prices can go significantly higher. New-crop marketing decisions need to be respectful of this scenario. Currently, there are just no incentives to consider new-crop sales. 

In summary, step back and look at the landscape of the past couple of weeks. Could it get any worse? Take a look at the horizon, could it get better?
World markets and global economies are on a fast track. The decisions by the Fed and the U.S. Congress to pump several trillions into the economy are a very big deal. It remains very possible, maybe probable, that price lows established early this year (as in now) could prove to be significant. As fast a track that so many of these macro historic inputs are capable of producing, the potential for commodity prices to be significantly higher 12 months from now must be respected. 

Two key factors to watch

The two most important markets that will determine bullishness in commodity prices in the months ahead will be:
1) The U.S. Dollar,
2) The price of energy.
If or when the Dollar trades below 99.00, it will signal a long-lasting downward move in dollar strength. If or when the near-term global supply glut of crude is reduced to normal levels, we will see crude oil values return to $50+ levels.

When these two things unfold together, we will be involved in what will be a long-lasting inflationary period, likely led by the U.S. and its weakening currency. This could set the stage for dramatic price swings away from current values.

In this business, things can change quickly. Stay tuned! 

 

Duane Lowry
Senior Risk Manager and Market Research Director
Silver Creek Commodities
Twitter= @DuaneLowry
Phone/text= 563-419-1300
The opinions of the author are not necessarily those of Farm Futures or Farm Progress. 
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