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What's happening with today's corn prices? Understand the fundamentals

Agriculture.com Staff 07/06/2010 @ 5:15pm

Last month I wrote about scenario planning as it applies to commodity markets and developing your marketing strategy. One major component of understanding the markets is understanding the basics of fundamental analysis in the current marketplace. Only then can you begin to understand what the markets might be doing, and begin to determine your next marketing strategies.

Fundamental analysis can be broken down into two essential words: supply and demand. Supply and demand is a very simple equation, but it gets more complicated when you try to forecast prices in the future. Commodities trade in cycles -- annually as well as over years. Sometimes supplies will be tight and prices will be high. Other times, we just have too much of a commodity and prices fall accordingly.

So, who tracks current supply and demand? The USDA has a sophisticated monitoring system, which announces on a monthly basis the current and projected supplies, as well as demand.

On the supply side, they track:

  • US and Global Planted Acres
  • US and Global Harvested Acres
  • US and Global Yield/Acre
  • US and Global Final Production Numbers

On the demand side, they track:

  • Crush Numbers (soybeans and soymeal)
  • Bio Demand (corn for ethanol and soybeans for biodiesel)
  • Exports
  • Feed Usage

When you add up total supplies and subtract total demand, the number remaining is termed as the "ending stock."

When it comes to your marketing, here are the key components to remember:

  • If ending stocks are large but getting smaller, prices will trend higher.
  • If ending stocks are large and getting larger, prices will trend lower.
  • If ending stocks are small but growing, prices will trend down.
  • If ending stocks are small and getting smaller, prices will trend up.

Here's another fact to bear in mind: It is PERCEPTION or ANTICIPATION of the above components which drives the market. Here's how that applies to what's happening with corn prices:

RIGHT NOW: The market is starting to perceive that corn ending stocks are large and getting smaller, and prices overall are trending higher. In other words, the market is moving higher on gossip. Officially, there is NO exact number to prove the above perception. All we know is that currently 8% of the corn crop is under snow and not harvested, therefore, no hard data of 2009 supply exists. Traders are concerned that the 8% standing in snow may lose bushels, therefore supply on a near potential record crop, might not be as large as initially perceived.

There's lots of wishy washy, not concrete talk in that previous sentence. It's that wishy washy talk that makes the market move. Bear in mind, once we do have all of the final supply and demand numbers for 2009, it will be months from now, and the market move may already be over. (Remember, as you may have heard around the agricultural industry before, "A known fundamental is a useless fundamental.")

While understanding fundamental analysis is a key component of your marketing, it is only one component. Relying on market OUTLOOK to make pricing decisions will leave your guts tied in knots. That is why it is so important to learn to make marketing decisions strategically and not based on an outlook. When you have the information to make a proper outlook, that information has already been factored into prices, it is old news and the price move is over with. When you focus on outlook and what HAS happened fundamentally, and while you were WAITING to price with confidence to make your marketing decision, prices slipped away. The opportunity is gone.

So, tempting as it might be to wait until we are 100% sure of what demand is, or to be 100% certain of where our supply is at, remember this: Often times, once the market is 100% certain, it is 100% certain that your pricing opportunity has passed.

If you have questions, you can e-mail Naomi or post a marketing question here:

Last month I wrote about scenario planning as it applies to commodity markets and developing your marketing strategy. One major component of understanding the markets is understanding the basics of fundamental analysis in the current marketplace. Only then can you begin to understand what the markets might be doing, and begin to determine your next marketing strategies.

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