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Bam, Boom! Bear market!

Agriculture.com Staff 01/14/2010 @ 7:27am

Last week we commented how prices seemed to be at a crossroads. Soybean prices had been drifting lower in a choppy format, while corn and wheat prices seemingly were drifting higher. The dichotomy between these two different directions was puzzling. Of course, the stronger U.S. stock market, crude oil, and improving metals prices and weaker dollar all were contributing to a strong market in grains.

But then, the USDA report comes out Tuesday, and prices promptly dropped over 50 cents/bushel in 24 hours for corn! Bam, boom: Bear market! What changed so quickly to turn speculators to the bearish side?

First of all, all the uncertainty about low test weights, unharvested corn, and the reduced quality of the U.S. corn crop seemed to be erased when USDA penciled in a new record large corn yield. The hike to over 165 bushels/acre was accompanied by a hike of 300,000 acres of projected harvested acres (and 100,000 planted acres). Yes, a hike, not a decline as many expected due to the socked-in-by-snow corn still sitting in fields in the Dakotas, Minnesota, Wisconsin and various other Corn Belt locations. Most feel 400 to 500 million bushels of corn is still socked in fields. But that didn't even matter to USDA. Apparently the corn yields are out there, and the corn crop was that good in the U.S.

Not only was the corn and soybean crops better than expected in the U.S., but South American corn and soybeans also are good -- so good in fact, that USDA hiked both corn and soybean production out of South America. Not only that, but the number of acres available to plant corn and soybeans in the U.S. for 2010 is 6 million acres larger than last year due to a cut in winter wheat planted acreage.

To add insult to injury to bulls, wheat prices dropped with the news as well in spite of the drastically lower U.S. winter wheat planted acreage. But alas, wheat is a feedgrain, and if corn prices were to go down, then wheat had to go down as well. So here we sit, with some dramatic gaps lower on charts that point to still lower prices in the future. Of course, we've dropped so quickly that we are likely to get a correction first, but clearly the market has taken a bearish turn with the most recent report, and then the reaction of traders to that bearish report. The reaction was even worse than one would expect based on numbers alone, which meant that many were leaning the wrong way on this report day.

As we noted last week, while prices were rising, we went above the APH based crop insurance price levels established last fall by significant amounts. APH price levels are set at seemingly low levels with wheat $4.80, corn $3.55, and soybeans at $8.55. The new crop futures which set revenue prices were trading at around $6 HRS wheat, $4.40 corn, and $10.20 soybeans before Tuesday. These prices were much higher than the APH determined price last fall, and we suggested they may be telling us something about price levels and the attractiveness of sales. They were pretty decent for making some 2010 sales, with prices at profitable levels for almost all areas of the country.

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