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Get ready for a demand-driven market
What a difference 19 months can make. In August 2012, corn futures rallied to $8.44 per bushel. Then after two years of global crop problems, farmers in North America and South America had great crops in 2013. The net result: The price of corn dropped by half, falling from $8.44 to $4.20 (the year-to-date low as of this writing). Meanwhile, the soybean market that topped out at $17.90 per bushel dropped back more than $5 per bushel to the lows this fall.
The bullish sentiment at grain elevators, equipment dealers, and land auctions has given way to fear that prices may continue to go much lower into the fall of 2014. That is possible, but I think the lows that are put in this fall or in early 2014 will prove to be major long-term cyclical lows.
During the 39 years that I have traded the grain markets, I have lived through a few of these big up moves that were followed by major down moves.
The long-term grain cycles all projected major lows in late 2013 or early 2014, yet even I am surprised at how far corn futures have dropped this year.
If you study the long-term CBOT corn monthly continuation chart (above), you can see the major lows. They were in 2009, 2005, and the fall of 2000.
For soybeans, the lows also appear to come in about every four to five years. The long-term CBOT soybean monthly continuation chart (below) shows major lows in 2009, 2005, and in the fall of 2001.
This doesn’t mean that when prices bottom, corn will turn right around and rally back to $7 or that soybeans will hit $15.
However, I do think the lows this fall will prove to be major ones. After that, look for a retracement rally, bringing prices up at least partway, as we move into spring and summer 2014.
Watch four signals
Here are four signals to watch in the charts to see if the lows this fall prove to be the major cyclical low in the grain markets. (Note: If the lows are not posted in the fourth quarter of 2013, look for the lows to be in by the end of the first quarter of 2014.)
Watch where the December 2013 corn contract goes off when the trade stops on December 2013 corn futures on Friday, December 13, 2013. If the March 2014 corn futures can't drop back to fill that December-to-March continuation gap, then odds are very high that the lowest lows came in the fall of 2013.
Watch if the March 2014 soybean futures contract can hold above the lows that the November 2013 soybean contract made in October 2013. If the March contract takes that out, then it can signal still lower prices for later in 2014.
Watch the Continuous Commodity Index (CCI) chart. This broad-based commodity index (also known as the “Dow Jones of Commodities”) shows a long-term pattern of bottoming every four to five years. If prices in January fall below the fall lows, then it signals lower overall commodity prices for the first and second quarters of 2014. A more positive signal will develop the first month that the CCI closes above the previous month’s high. That will signal a low in the overall commodity markets.
Watch for a positive close after a negative USDA report. There’s an old trade saying: “It takes a negative report to put in a low.” This has worked a lot in the last decade as I have watched the USDA reports and the market reaction to those reports. Watch for a possible negative USDA Crop Production Annual Summary and USDA Grain Stocks reports on January 10, 2014, with a positive response. By that time, all of the bearish news may be built in.
Once the grain markets have bottomed, I expect several weeks – or even several months – of sideways grain markets, with prices staying in a well-defined trading channel.
Even when prices are chopping along in a trading channel, watch for the following two indicators that prices are turning higher:
Your cash basis bids. If the basis goes to a 10¢ or 20¢ premium to the CBOT futures in most of the Corn Belt, then it is a positive signal of strong cash demand and a positive signal for futures prices.
The spread from the March 2014 to the July 2014 corn futures contracts. The spread at this time shows the July 2014 contract trading 15¢ higher than the March 2014 contract. In this industry, it is called a carrying charge. If that carry drops to less than 10¢, then the corn market is indicating it wants your cash corn now. This, again, would be a positive signal of strong demand for cash corn.
Here are my four recommendations of what you should do with your cash corn and soybeans.
Check your cash bids vs. your bids out into March, June, and July 2014.
Is the market paying you to store the crops? If not – especially for soybeans – then selling the crop and replacing it with call options may be a good alternative.
Put a plan together that spreads out your risk by using several different marketing alternatives.
The combination should include cash sales, hedges, and puts.
Make some 10% cash sales on any midmonth rallies that develop in January and February if a positive basis develops in your area.
Call in some price targets above the market where you are willing to make additional sales.
Following these four recommendations is part of any good marketing plan.
Note: Trading of futures and options has substantial financial risk of loss and is not for all investors.