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Roy Smith: Delayed frost rally?

It is October 1 and harvest is almost in full swing here in Cass County, Nebraska.  The farmer I harvest with started on soybeans Monday. He raises seed beans and always gets started as soon as the beans get close to 13%. By Tuesday afternoon, it was plenty dry for the early maturing variety that he raised. Most farmers are starting on corn because the medium and late maturing beans have a little too much green for the combines to work well. 

It is too early to judge how the soybeans yields are. Farmers are finding corn yields a little below expectations. Not enough has been harvested of either grain to get a good handle on production. 

It has been interesting to listen to market commentary and watch price action the past month. In late summer, it is normal for farmers and traders to think that the soybean yields will be below average because of numerous production problems. That factor tends to cause a price rally going into the September crop report. When the report is released the anticipated yield is estimated by the government to be average or better and prices drop. 

The psychology this year was that farmers expected corn yields to be well below last year. Prices rallied at the time when they normally drop. The government report that was released Thursday morning found many more bushels of carry over than the trade anticipated. The result was that prices dropped in response to stocks that are 300 million bushels more than anticipated. 

The psychology of the corn market in 2010 is similar to the soybean market in an average year, except that it is delayed by three weeks. If the same psychology carries out in the corn market as it usually does in soybeans, it will take about three more weeks for prices to adjust to the additional bushels. This negative action may produce the harvest low on which to begin the rally that I call the “dead cat bounce”. I normally start tracking that move by mid-September. I have not started yet because there has not been anything that looks like a harvest low yet. Next week, I will have that chart up to date.  

A big question is what price it will take to adjust to these unexpected numbers. Will the reduced yields being reported from the country offset the extra bushels found in Thursday’s report? Will speculative traders resume their buying before there is much damage done to prices? At least as important is whether soybeans will follow corn lower or will the speculative buying that was previously in the corn pit switch over to soybeans? Thursday’s report is a game changer, at least for the short term. 

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