Markets unPACKed Op-Ed: This Grain Situation!

Op-Ed: This Grain Situation!

 

To say the grain markets have been heating up would be like saying the heat of a forest fire is comparable to your grill. In fact, the grain markets were at perfect grilling temperature last fall. Now the heat is being felt globally, with no sign of cooling down yet.

In the last month, July corn futures have rallied $1.775 and have cemented at the $7 region. Just to put it in perspective, corn prices have jumped 142% in the last year. We have not seen prices this high since July 2013, and all-time highs were hit in August of 2012 at 843.75 when severe U.S. drought conditions led to a horrible crop. In fact, 2012 is the year everyone talks about, and those years come around about every 10 years in agriculture. This year we have drought concerns mainly in the Northwest spring wheat regions, while Brazil is also showing extended dry forecasts. Some are describing Brazil’s drought as “severely critical.” Wheat prices have rallied $1.45, and soybeans have been along for the ride, closing 27 cents higher to 1569.25 as of this writing on Friday, May 7, with no major news around that rally.

Planting in the U.S. for corn and beans is going very well and leaped ahead last week. Iowa is 29% ahead of schedule in soybeans and 10% ahead of schedule in corn from last year’s pace; it is 45% ahead of the five-year average. In fact, in corn, almost every state is ahead of schedule except for Missouri. China demand continued through April, and although some canceled cargos hit the tape this week it certainly didn’t spook the markets.

So, shouldn’t this current scenario be great for the producers and the coops? Well, not exactly. When a producer is bullish…I mean like running of the bulls in Pamplona bullish, they will stop at nothing to convince themselves that this price momentum is here to stay. And they are not wrong to think that. When planting is ahead of schedule and yet the market rallies another 40 cents this week without concern of such fundamental news, they are right about momentum sticking around. However, it is concerning because farmers are not starting their usual spring/summer hedging plans that they would have normally undertaken by now. In short, they are not selling futures to lock in their board price toward physical sale, and that is wreaking havoc on grain merchandisers who need to book grain for future deliveries. Their concern is watching their farmers trying to call the tops. Also, a grain manager who convinced a farmer to sell grain when prices were around $5.50 might look good for about a week but is probably getting chewed out or the silent treatment from that producer now. What do you possibly sell producers on? Our sell is about BUILDING that price, not PICKING that price. Getting some trades on that will build a high sales price. Please do so before this comes crashing back down and we are back to $3.40 corn…like where we were a year ago. Remember?

The call to panic is mainly from the co-ops right now as they experience margin calls on short futures they may have or look for a way to make up for any losses after selling grain too early. Hundreds of thousands of dollars in margin calls do not feel good; it’s these moves that lead to co-ops going out of business. All I have to say is let professional traders help you through options. I write this after having spent a long day scrambling to help some clients in some sticky situations while helping others convince farmers to do something before it is too late. It seems as though that when the farmer is making money, the co-op is scrambling.

You have to ask yourself, is anyone just winning from these markets? Sure. Speculative traders. While net long positions in corn declined last week, they increased their bullish sentiment in soybeans and wheat. We are still at record levels in net long positions across row crops. We have seen this trend since December. Who is to say these trades are profitable, but speculative trading is looking a little less dramatic than bonafide hedgers. Plus, corn is cheaper than bitcoin.

Finally, inflation. Higher input costs on food (like corn, soymeal, soybean oil) will be pushed to the consumer, leading to higher food prices coming up. Keep your eye out for that.

 

To send a question to the author, or to learn more about this topic, click here.

For assistance with brokerage or hedging services, please click here.

 

Disclosure: The risk of loss in trading futures and/or options is substantial. Past performance is not indicative of future results. The information in this message derived from third-party sources is believed to be accurate and reliable; Coquest does not guarantee the accuracy or completeness of the information. Opinions expressed in this material are subject to change without notice. This report should not be interpreted as a request to engage in any transaction of futures, options, and/or OTC derivatives. The information contained in this material is not to be relied upon in substitution for the exercise of your independent judgment. Seek independent financial, tax, legal, and accounting advice from your own professional advisers, based upon your particular circumstances.

Back