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Markets Search for a Bottom

08/01/2014 @ 2:40pm

As July comes to a close, there is a lot of question over whether or not the grain markets have overdone it to the downside. Only time will tell. With high crop ratings and a relatively conducive weather forecast for crop growth and maturity, it may be challenging to find aggressive buyers anytime soon. Yet, all markets find a bottom at some point, often when they are most bearish. The question now is, have we reached our most bearish point?

For now, we'll say no. While it's tempting for end users and speculators to buy grains after a significant drop, the old saying is big crops get bigger. At least that's the perception the market is likely dealing with now. The problem with being overly pessimistic at this point is that it's still July, and August weather counts, potentially in a very big way. In addition, the northern Bean and Corn Belts are behind schedule, and it will take good fall weather to avoid concerns of losing crop to frost. Yet, when looking at the big picture, prepare yourself for prices to go lower easier than higher. The trend is down, and the attitude is neutral at best. The inability for corn and wheat to even establish a small bounce is telling. Expectations are that farms are cleaning out bins in preparation for a large new crop. This will likely keep some pressure on prices, or at least a cap on the market's ability to rally.

Moving into the August 12 Supply and Demand report, one should anticipate surprises. From a producer's perspective, the last thing needed is another negative surprise. Consider purchasing short dated September put options, which expire August 22, and are based off December futures. Or, look at fence strategies into March, in which you buy a put and sell a call. Other strategies are buying December puts, or going short into the report on December futures.

As for wheat, the trend remains down, and yield numbers continue to be impressive in the northern half of the Midwest. Go into the August 12 report with a defensive bias, mainly through the use of puts and/or cash sales. Wheat is a world crop, and at present, we don't see much concern with world conditions, so expect the USDA to likely raise world production estimates.

Soybeans should be treated with a defensive posture, though this market has a more finicky side to it. On the one hand, expectations for a record crop and carryout well over 400 million bushels suggests further downside for November beans. Therefore, maintain a defensive posture. Yet, moving into harvest, old-crop supplies are tight and difficult to come by. If weather rears its head in August, the most critical month for soybean crop maturity, then prices could make a quick rebound. Therefore, we like the put strategy best for new crop.

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If you have questions or comments, or would like help implementing strategy for the year ahead, please contact Bryan Doherty at 1-800-TOP-FARM ext. 129.

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.

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