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Don’t hold onto corn, soybean crops too long, analyst says

This bull run should be tended to, analyst says.

The bull run in the grain markets started in August.

That’s when nearby corn futures bottomed at $3.07 and nearby soybean futures bottomed at $8.70. From that low, corn and soybean prices more than doubled by the second quarter of 2021.

Corn chart

I have watched more than 30 bull and bear markets in the past 40 plus years, and this was one of the most exciting.

Why do we get bull runs? The No. 1 reason: Demand. In a demand-driven bull market, you’ll see several developments.

First, the nearby contract will gain on the further-out contracts. (This is called bull spreading.) Another characteristic is firming cash basis bids. This usually results in cash bids going to a premium to the grain bids out 30 to 60 days.

In other words, cash buyers want your grain now, not later. All these highlights of a bull market developed in the corn and soybean markets starting in August and continuing into the second quarter of 2021.

There is a second reason for a bull run: Fear. Not just any fear, but fear about the supply chain. Is there an infrastructure crisis? Is there a weather scare? Think back to the hot, dry weather in the summer of 2012.

The national corn and soybean yield potential moved sharply lower from late June into August 2012, and the corn and soybean markets exploded to all-time highs in August.

The grain markets turned lower into the fall of 2012 and then ground lower to the major lows in August 2019. The 2012 rally stalled when ethanol producers shut down or slowed down. At the same time, U.S. grain exports slowed as other global suppliers offered lower prices.

The August 2020 rally that continued into the second quarter of 2021 started because of demand, but kicked into high gear when the rain stopped in central Brazil. In just six weeks, the projected yields of their safrinha (second-crop) corn dropped by more than 800 million bushels, increasing market volatility.

Corn and soybean prices reached their highest levels since 2012.

This has been an incredible bull market move, and it will be followed by a bear market. This is not a question of if, but a question of when.

Both the cash market and the futures market are showing that prices are better now than later. If you look at the alignment of the cash market, you see the August corn and soybean bid is at a 20¢ to 50¢ discount to the July bid. Meanwhile, for the September or October futures contracts, there is a delivery discount of over $1 per bushel in corn and $1.80 in soybeans.

At the beginning of the demand-driven markets, this would have meant, “We want your grain now, not later.” However, we are not in a demand-driven market anymore. Demand has already pushed prices up. Now it means, “We don’t want to pay that much for your old-crop grain anymore – we can wait for harvest.”

This means it is dangerous to hold on to your old-crop corn and soybeans too long.

My long-term chart studies projected a major 68-month low for corn in August 2016. Those same charts now project another major low for corn between July 2022 and October 2022. For soybeans, the April 2020 low suggests another major low for soybeans between August 2023 and October 2023.

Soybean chart

Soybean chart caption: This daily chart compares the July and November 2021 soybean futures. You can see that in August 2020, the July 2021 soybean futures were trading at just a 5¢ premium to the November contract. Then the soybean market exploded. By January, the July contract went to a $2.20 premium to the November contract. After a 60¢ correction, the spread rallied, reaching more than $2.00 per bushel in May 2021. When the bull spread collapsed in May, both old- and new-crop soybean prices turned lower.

There is some good news. I do not expect another seven-year slide in commodity prices like we had from 2012 to 2019. The bad news: With higher input costs for 2022, profit margins will be squeezed.

In addition to my long-term chart patterns, I also watch seasonal price patterns.

The concept of seasonal selling has worked eight of the past 10 years. The exceptions were 2012 and 2020. I expect a harvest low for corn between August and October and a harvest low for soybeans between September and November. With tight stocks in the United States again next year, I think the grain markets will post impressive postharvest rallies in cash and futures markets.

Here are three suggestions for marketing your 2021 and 2022 crops:

1. In 2021, storing corn and soybeans paid off. Both the futures and basis rallied, and cash bids soared. This isn’t likely to happen again in the spring and summer of 2022. I think that locking in a good basis this November or December will be the best merchandising move. You can maintain ownership with call options or call spreads.

2. Brazil has had crop production problems the past two years. I would be surprised if the country has a third major problem during the 2022 crop year. The dry weather in April and May this year produced a huge rally into the harvest of the Brazilian corn crop. A different weather pattern in 2022 is likely to result in a much different corn and soybean market next year.

3. Many farmers who were upset because they sold too much too early in 2021 will hang on too long in 2022. Don’t be one of them.

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