Is the bear on the run?

If high prices cure high prices, then low prices cure low prices.

Market activity over the last three months has been dramatic in commodities and in equities. This Perspective, however, will focus on the grain markets. In 2012, a drought in the U.S. drove grain prices to all-time new highs. Corn reached well over $8 a bushel and soybeans well into the teens, peaking at just under $18. Supply rationing occurred.

The old saying is “high prices cure high prices,” or as some may say suggest differently, demand destruction occurred. In a very macro sense, this is what happened to the commodity markets as corn, soybeans, and wheat prices plummeted in the years ahead. Better weather, increasing technology, and the sting of high prices allowed for supply buildups. It took several years of low prices before demand returned.

Yet, from 2016 through 2019, prices continued to languish at a low level while world supplies continued to grow. The era of low prices was lasting longer than most previous historical periods. A new administration clouded the picture, pushing for new and hopefully better trade deals. This may have amplified the trend for lower prices. COVID-19 and an energy war exasperated the bearish mind-set in the spring of 2020, when it looked like there was little hope for the grain markets. Yet, a significant turnaround and subsequent price rally started in August. What happened and what is happening?

If high prices cure high prices, then low prices cure low prices. Producing grains domestically and worldwide at or below the cost of production only makes sense if you can supplement producers. Market facilitation payments and other government programs helped many to survive. Yet, the bigger and quiet event that was occurring worldwide was increasing demand. Trade deals were also accomplished and in place.

Since August, the biggest consumer of commodities, China, has stepped up, buying copious amounts of soybeans and grains from the U.S. Prior to that, they were significant buyers of South American crops this spring and, in fact, may have drained inventories. A year and a half ago, African swine fever ravaged the hog herd in China. Had not this occurred, it is likely prices may have found a long-term low last year. Instead, it looks like this year, due to some worldwide weather issues and growing demand, the trend of low prices may be coming to a foreseeable end.

On the August USDA Supply and Demand report, significant carryout was forecast on the heels of high crop production estimates. Yet, the winds of change were at hand. The report failed to ignite a negative reaction, despite confirming prospect for big supplies. Investment money likely believed supplies were at their peak and would probably diminish.

Dry weather engulfed most of the Midwest, in particular Iowa, starting in late July. A freak windstorm wreaked damage, again in Iowa, destroying perhaps as much as 300 million bushels of corn. China began to buy in earnest and investment money poured into commodities. Fast forward to mid-November, and commodity funds went from 200,000 short contracts to over 300,000 long in corn.

Export sales have skyrocketed at a pace never seen before. Trade deals are in place, commodities are cheap, and the first sign of adversity to a crop production quickly leads to massive buying. The real question at hand: Have prices finally broken the trough of negativity that has kept rallies in check? The practice of massive fund selling has exasperated downside price movement – is that changing?

It may very well be that the tide has turned, and from this point forward, demand-driven markets will buy price dips, and adversity to crop production will accelerate upward price activity. Over the last seven years, rallies have quickly disappeared. This trend may likely be over. As world supplies tighten and attention focuses on production, any hint of weather adversity and producer selling likely slows and end user buying advances. This feels very much like the 2006 through 2012 era when prices reached a new platform and then held together for sharp rallies. It took a decade to build world supplies. Owning the physical was powerful.

Preparation for marketing is the key. This Perspective has urged producers to become students of the market and learn how to incorporate tools to create a balanced approach. These include the use of forward contracting, futures, and options. Knowledge is strength and the more you understand the tools in your toolbox, the better armed you’ll be for what likely will be more volatile markets in the years ahead. The bull is awake, and the bear is retreating.

If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-top-farm, extension 444.

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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