Grain prices rally sharply
Grain prices turned sharply higher with the forecast of decreased grain production out of Ukraine in 2022, as well as the large reduction in global corn, wheat, and oilseed exports out of the Black Sea.
Here are five key fundamental factors affecting prices:
- The USDA has projected corn exports out of the Black Sea to fall by 6 million metric tons.
- Ukraine was responsible for more than 50% of global sunflower seed exports.
- Farmers in Ukraine have been encouraged to plant more wheat and millet and less corn and sunflowers for export this year in an effort to produce enough food for domestic consumption.
- Wet weather has delayed planting in the United States.
- Sharply higher fertilizer prices accompany limited availability.
Add all these factors together and corn futures rallied to $8 per bushel. Soybeans advanced to more than $17, and Chicago Board of Trade wheat futures rallied to all-time highs. December (new-crop) corn rallied to top $7 per bushel for the fourth time ever. November (new-crop) soybeans rallied above $15 for the third time ever.
At many late-winter seminars and webinars, these two questions kept being asked:
- How high can prices go?
- When are grain prices likely to turn lower?
I normally responded with my own questions:
- What is your cash and new-crop marketing plan?
- What does history say when prices move this high?
First, let’s look at your cash marketing plan. For the cash crop, we are in the key seasonal time for a high. Last year, farmers who sold out in early May hit the high for the year. I expect a similar pattern this year. Compare the risks to the reward for the large discount of the cash market when we head into July and August. Holding grain past May is very likely to be a big marketing mistake. If you want to stay bullish, then sell the last of the cash corn and soybeans and buy some out-of-the-money call options.
I build this chart of November soybean futures by only charting the price of November soybean futures. The week the nearby November soybean futures contract expires, I start charting the new November soybean contract. You can see this is only the third time that November new-crop soybeans have traded above $15.00. The other years were 2008 and 2012. In 2008, soybean prices dropped over $9.00 per bushel into harvest at just below $8.00. Much of the collapse was because of the major financial crisis in the U.S. stock and commodity markets that year. In 2012, during which extreme weather and drought occurred, prices rallied to the high at $17.94 in August 2012. November futures then turned lower into a harvest low at $14.00 per bushel.
Now let’s look at your plan for new-crop 2022 sales. We have made the recommendation to have 30% to 50% protected with hedges, puts, or both. How much should you do? Should you do it with hedges, cash contracts, or puts? Those answers will depend on your storage situation and when you need the money. I am a seasonal seller. From May to early July, I want to get most of the new crop protected against lower prices as we head into the fall.
My second question was about history: What does history say when prices move this high? The simple answer: Prices eventually go lower — sometimes sharply lower. I am focused on how to handle the risk on new crop corn and soybeans.
I build this chart of December corn futures by only charting the price of December corn. The week the December corn futures contract expires, I start charting the new December corn contract. You can see this is only the fourth time that December new-crop corn has traded above $7.00. The other years were 2008, 2011, and 2012. In 2008, corn prices dropped over $4.00 per bushel into the harvest low when the United States was in a major financial crisis. Then in 2011, prices dropped $2.80 into the harvest low at $5.80. In 2012 (during a mega drought that year), prices rallied to the high at $8.40 on August 21, before pulling back to the harvest low at $7.10.
For corn, this is only the fourth time new crop has traded above $7: in 2008, 2011, the mega-drought year of 2012, and now 2022. For soybeans, prices have only traded above $15 three times: in 2008, 2012, and 2022. The majority of the time, prices went much lower into the fall. In 2012, the hot, dry weather in July and August rallied prices to a major high in late August 2012. Prices did pull back into a harvest low in 2012, but then continued lower all the way into August 2016.
When I study all the individual charts, the year 2022 reminds me most of 2011.
Note: The risk of loss in trading futures and/ or options is substantial, and each investor and/or trader must consider whether this is a suitable investment. Past performance — whether actual or indicated by simulated historical tests of strategies — is not indicative of future results. Trading advice reflects good-faith judgment at a specific time and is subject to change without notice. There is no guarantee the advice given will result in profitable trades.