Bryan Doherty: Tale of two trends
In January 2010, the USDA surprised the marketplace by increasing yield per acre. Consequently, prices (which had been trending upward for three months) rapidly descended and closed limit lower. That was the beginning of a downtrend that lasted until the end of June. Subsequent USDA reports (in winter and spring) indicated relatively unchanged demand and increasing supplies. In June, however, big changes occurred.
On June 30, the USDA Stocks Report indicated a 300-million bushel decline in stocks and well over a 1-million acre decline in planted acres. That was the beginning of a bull market that may not have seen its top. Bears will argue that the market topped November 10 when a bullish USDA report resulted in a bearish key reversal, a technical topping signal. Since then, prices have made a healthy downward correction. They found support at the upward trendline and new buying interest, pushing prices back to a midway level between the high on November 10 and the low on November 23.
For corn producers, yield figures could likely be the biggest surprise of 2010. Prior to harvest, most farmers, USDA crop ratings and private analysts indicated a crop that would likely yield 160 to 165 bushels per acre. Through the November report, the yield numbers slid down to just under 155 bushels. For many producers, the corn crop looked great and, in fact, yielded very high, though not as high as anticipated. It's a year where most producers would likely tell you their crop was a little less than anticipated. Over the last 15 years, most farmers would likely indicate their crop year-in and year-out runs a little better than anticipated.
Perhaps the other surprise was the market was not anticipating such a strong demand out of China for soybean and soybean products. Five years ago, the all-time high for November bean futures was $8.99. Prices exceeded $13.00 this fall, despite a record crop. Ravenous demand, as the world shrinks from the viewpoint of shipping capabilities and grows from the perspective of an increasing middle class, will keep demand healthy. China's strong buying interest would suggest they had an interest in buying enough inventory for now, without waiting to see what South America may or may not produce for a crop. Demographic studies estimate that the world could see an increase of 50 to 100 million people per year moving from poverty into middle class for perhaps the next five to ten years.
A third element was the return of speculative money and funds. When prices became cheap, they stepped in front of the market and bought. From a long-term perspective, investors looked for opportunity and they saw one with cheaper commodities by June 2010. The investment community will likely continue to recognize tight world inventories. The bottom line is that volatility is likely to stay.