Time for change?
Conventional wisdom says that fundamentals ultimately determine where prices go. In the meantime, there can be a lot of seemingly unexplainable moves. Fundamentals and perceptions of what the fundamentals really are cause excitement in the markets that frustrate those of us who depend on the price of commodities for our livelihood.
The problem is that the fundamentals change over time. Exactly when prices respond to the change in fundamentals depends on a lot of things besides supply and demand. More than anything else it depends on the psychology of the players in the market.
This year we saw new crop corn prices reach historic highs based on the anticipation of increased demand from the ethanol market. The highs came at a time when the factories that were going to cause the big demand were still many months or even years from going into production. Now prices are seeking a level that will clear out the largest crop in history.
The wheat market had almost exactly the opposite psychology of corn. A Late freeze and other production problems caused brief surges in the price. Historic highs did not come until all of the bullish factors were known. Farmers wonder what made wheat respond to changes in the fundamentals much slower than corn.
For the past year, soybeans have been ignoring the seemingly bearish factor of historic high carry over at the end of the current crop year. Commentators wondered how the fundamentals could be so negative and prices continue to be high.
With the release of the planted acre report last July, it is now obvious that the fundamentals were not what they seemed. With a big cut in acres, the anticipated supply and demand look much different.
Long term seasonal charts show instances of changes in psychology changing price direction. The September crop report is one of those times. The normal price pattern is for soybean futures prices to rise in August, then turn around and drop abruptly after the report.
The psychology during this time is that the bean crop has some production problems that cause traders to anticipate lower yields. When the report is released, the fears of reduced production diminish and prices drop.
The most recent rally in the soybean market is caused as much by anticipation of lower production and sympathy with the price of wheat as it is by production problems with this year's crop. I wonder if the September crop report next week will change the psychology of the soybean market as it has in past years.
My feeling is that soybean yields will be good. We will not know for sure until harvest is underway. It is easy to see a scenario where soybean prices drop following the report, followed by a rally as the focus of the market changes from this year's supply and demand to anticipating a reduction in carry over at the end of the 2007-2008 marketing year.
I do not predict prices. However, I can make the case for soybean prices to follow corn and wheat to new highs after the harvest pressure is past and when the market anticipates tighter supplies in the coming year.