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Roy Smith: Psychological markets

One of the 'Murphy’s Laws' for commodity traders says, “The market is not logical; it is psychological. 
The market’s reaction to the government report yesterday seems to prove that principle to be valid. As I looked at the numbers released yesterday morning, there did not seem to be any shocking revelation. Projected corn production was slightly larger than trade estimates but within the range of guesses. Soybean production was at the low end of trade estimates. Logically, the response to those numbers should have been a non event. In times of bearish psychology, predictions of record yields would have resulted in prices going sharply lower in response.
Stocks at the end of the marketing year were somewhat more bullish than production numbers. The report projected slightly less carry over than the trade estimated. Stocks of soybeans were already projected to be very tight at the end of this year and they remained slightly lower than the trade estimated at 160 million bushels, but higher than last year’s carry over of 138 million bushels. 
Market action following the report was probably the most interesting thing that happened yesterday.  Prices opened higher but promptly went down, at one point being a penny lower in beans and only a penny higher for corn. By the end of trading, however, corn was more than 10 cents higher and beans were 13 higher. It seemed that the trading pits were trying to run the psychology both ways to see whether the bulls or beans were strongest. In the end, the bulls won and prices closed up on the day. 
There are a couple of outside factors that farmers need to keep in mind as they make plans for this year’s harvest. The first is that stock of soybeans are very tight now, while cash corn seems to be plentiful. I checked with elevators in my area and they report that old crop corn is being taken only when there is some place for them to haul it. We will probably be still trying to move the 2009 crop when the harvest starts on this year’s production. 
Soybeans are exactly the opposite. The market still has a premium bid for soybeans to be delivered immediately.  The market is telling farmers to store corn and sell beans. That is a positive indicator long term for soybean prices!
The second thing that should be remembered is that the middle of August is a time when corn prices are normally dropping and soybean prices are normally rising.  It is not unusual to have the grains go opposite directions. Corn is mature enough that fear of early frost or other weather problems are not on trader’s minds.  Frost is still a possibility for soybeans. 
An interesting side note is the fact that soybean carryover is projected to double at the end of the next marketing year. For the past several years, government reports have projected soybean carryover to have a big increase in the following year. In most of those years that increase did not happen and soybean stocks were much tighter than projected. Time will tell whether they are correct this time. My bet is that the government projection will be wrong and the 2010 soybean crop will be used up just as last year’s was.
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