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SoyRoy: The Charts Look Their Worst in 40 Years

07/11/2014 @ 11:45am

When discussing grain marketing strategies, one of the topics that usually comes up is risk. Specifically, we like to use the term risk premium when considering the practice of forward contracting grain that has not been harvested yet. Risk premium is one factor that tends to increase the potential price of grain that will be priced before the actual quantity to be harvested is known. Therefore, the first risk factor is that yields will be short of expectations. In a market situation where prices gradually drop from spring until harvest, one of the main factors is that production risk becomes less as the date for harvest gets closer.

This year, the risk in the grain markets is much different. For soybeans, the risk factor is not so much out of the ordinary. However, the corn market has taken on a look totally different look from what we are used to. To begin with, the drought in the summer of 2013 did not push up prices as much as most market watchers thought should be warranted. Considering that it followed a drought in 2012, it seemed as if prices should have started from a much higher platform than they did. The second risk, therefore, was that the market did not follow the logic as it has in other dry years.

In turn, this affected the psychology of the market as farmers held off forward contracting grain because they thought that the big move was still ahead. The result was that there was more corn to move later in the season. Corn that should have been sold and moved at harvest was stored instead. That left grain in bins in the spring when we should have been focusing on fieldwork. The rush to move grain in May and June was more like what is usually expected at harvest or soon after.

My strategy of selling in increments worked well in this environment except for the fact that the net price was not what I wished it had been. Nonetheless, the last increment of corn was gone by June 26 and the money was in the bank. All that was left was to sweep out the bins in preparation for the coming harvest, two months in the future. By then I had stopped looking at the markets every few hours and was preoccupied with crop scouting and other pressing issues.

A couple of cool days allowed me to do the final sweeping and evaluate what repairs are needed to put the grain handling system into condition to use this fall. The lush appearance of the crop has farmers wondering just how much bigger than normal the 2014 corn crop will be. I tuned into the markets on my truck radio, as I was hauling the last 82 bushels of sweepings to town. I was shocked to hear that the price of corn had dropped 53 cents since the day when I finished the last binful. In 40 years of farming, I do not remember a situation when the chart of corn and soybeans looks as bad as it does today.

I remember one situation in 1980 where soybean prices were locked limit down for five consecutive days. There was one day when there was some trading but no orders were filled because the market was so thin. That year there was a limit on how far prices could drop in one day. That did not really stabilize the markets because the orders were just adjusted downward until trading resumed. Buyers started buying a week or so later when prices were lower.

The worst thing about the situation this year is that there is little hope for improvement showing on the long-term charts until the middle of August. That hope is that the frost rally will come on time this year and that there will be a substantial move higher prior to the September crop report. A fourth risk factor, then, is that prices will not rebound as the season progresses like they usually do. My marketing plan calls for selling new-crop beans at that time to take advantage of that seasonal move. If that move does not happen this year, it is going to be a tough year.

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