Markets unPACKed: Demand and Inverted Markets

Demand and Inverted Markets


As we charge into a new month of 2021, ready to look for market opportunities, we find ourselves again in awe of the demand figures. The USDA’s weekly export sales report was published this morning. I urge you to check out Karen Braun, Global Agriculture Columnist at Thomson Reuters (@kannbwx), and on Twitter, for her colorful charts demonstrating this demand compared to years prior.

U.S. exporters have already sold 87% of USDA’s full-year 2020/21 corn export forecasts as of January 28th. Soybeans were 97% sold for 2020/21, above normal for old crop, but this is not as excessive as corn. However, in new crop soybeans, some 4.25 million tonnes (156 million bushels) have been sold for export in 2021/22 as of January 28, a 10-year high for the date. China bought 5.86 million metric tonnes, shown on the USDA report as of Thursday morning. These are historic demand figures. Karen Braun’s chart (Figure 1) demonstrates the corn export sales of old and new crop from today’s report more than doubled April 2012’s high. She commented that she would have been suspicious of such a chart at any other time, but this is a historical moment. Today, March corn futures made a new 7.5-year high of 558.

Figure 1.


It is important to discuss the dynamics of when markets invert. To recap: an inverted market (also known as backwardation) occurs when the spot price and near-term maturity futures’ contracts are priced higher than more distant maturity contracts. A normal market is the opposite, where futures prices are increasing as time to maturity increases. A principal theory of futures markets states that futures prices for stable commodities should be higher than spot prices due to carry costs and interest rates. Inverted markets typically occur when short-term disruptions in supply happen. Today’s picture fits this definition perfectly.

For the overall grain complex, we have:

  • Argentina trucker strikes
  • Brazil ports facing major jams after already reporting delayed harvest due to excess rainfall
  • Mato Grosso, Brazil, was only 5% complete as of last Friday versus 27% last year, the slowest pace in ten years
  • U.S. corn is significantly cheaper than China’s domestic supplies.
  • U.S. producers are not budging on much of their old crop ꟷ empty bins, some with little to begin with (due to Prevented Planting acres) or farmers not selling what they have, left coupled with insane demand

When stocks are scarce, markets will be inverted. The March and May contract in both corn and beans are inverted. I read this fascinating finding that at three months after harvest, market inversions occur only 2-7% of the time. Let’s say our harvest ended Mid-November…and it is now early February…so we are within that anomaly.

So, with all this said, what is the optimal hedging strategy in an inverted market? In old crop, a decent number of our clients are telling us farmers are just selling the cashꟷthe spot essentially. Why be short futures that do not factor in the cost of carry anyway?

And what about new crop? We are experiencing increased interest in OTC products like accumulators. We have to remember that this market can easily correct once demand cools. We would then see a return to carry, or close to it. Either new crop will catch up in price or the front months will be brought down to back-month levels, but likely a combination of the two will put the curve back to somewhat normalcy. With the uncertainty of price movement and the fear of missing out on rallies, one could focus on the safety and track record of a seasonal average, especially as the market is uncertain about upcoming U.S. production due to drought and demand strength.


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