Home / Markets / Markets Analysis / Corn market / Markets run out of gas-Bryan Doherty

Markets run out of gas-Bryan Doherty

05/08/2011 @ 10:00pm

For the last few weeks, commodities have come under heavy selling pressure almost across the board. Livestock experienced a significant set-back after being entrenched in a long-term uptrend since last summer. As an example, June cattle peaked at $121.50, and as of this writing are trading near $111.50, or a change of $10.00 per hundred weight. This is a drop of 8.2% from the high. That's a typical correction of a bull market, in which prices began their rally all the way down from $91.00. Yet, most of the set-back has come in the last month. After breaking resistance in January and then moving upward, prices now, in a one-month time period, are lower than they have been in the last 3-1/2 months. Hogs have struggled as well. The June contract peaked with a double top at $104.15 on March 29, and is now trading near %93.00. This is a change of 10.6%. Again, it is not a surprise to see a price correction, the surprise is the magnitude of how fast prices have fallen over the last month. 

In other agricultural markets, old crop July corn futures, after peaking at $7.88-3/4, reached a low this week near $6.80 or a drop of over $1.00. This is a change of near 13.7%. New crop corn has fared better, peaking recently at $6.84, and also managed to drop down to $6.32, before rebounding to $6.62 as of this writing. 

My point is to show a few examples where prices seemed to have lost their luster and it appears that speculative (or fund money) is leaving the market. As in any bull market, a top will occur often when conditions still point to higher values. We're not calling a top in these markets, though the way they have lost value (especially the livestock complex) it's easy to argue that a high could be in. A very rapid descent in the U.S. dollar this year provided fuel for higher commodity prices. A sharp sell-off in the dollar the past month, however, has had little or no impact for commodity prices. Energy prices, which have continued to grind higher all year may be taking their toll on consumer demand. 

Keep in mind that the futures market is always trying to predict the future and not necessarily representing what's happening today. New crop corn prices holding near the $6.50 area are likely representing some, if not quite a bit of, weather premium in prices. The market has anticipated issues with early planting and, despite continuous rain delays the last two weeks, the market has failed to muster any strength. In other words, it may be old news and it will take something fresh to drive prices upward. 

The point of this Perspective is to encourage farmers to be prepared and not over-analyze the market. If prices offer strong value and good return on investment, look at ways to lock this in, and yet, also look at ways to maintain an ownership position if desired. Often, by taking just a few minutes of time to analyze your different options, you will not only feel better about your approach to marketing, you will often find that you don't get caught making emotional decisions. It doesn't take a rocket scientist to figure out that corn prices could make a dramatic move higher or lower based on weather. Therefore, to try and outguess this movement might be a worthless use of your time. Instead, invest your time analyzing different scenarios and prepare yourself for a movement in either direction. This will allow you to balance out your emotion, and manage market movement, rather than react emotionally after a price move is already made. 

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