Grain trade ponders: How low is low?Grain trade ponders: How low is low?
September crop report took wind out of sails of anyone who thought the bottom was already in this market.
September 12, 2014
EVEN disbelievers who a few months ago felt that corn and soybean prices could not go lower have to be waking up to the reality that both corn and soybeans are in major bear markets.
The laws of economics have not been repealed. Bull markets invariably go higher than anyone expects, and the bear markets that follow those will almost always go lower than anyone can possibly anticipate.
We do not have a shortage of $8.50/bu. corn, and even though we will not likely have a surplus of $3.50/bu. corn, that doesn't mean it can't go much lower.
The U.S. Department of Agriculture's September crop report has now taken the wind out of the sails of anyone who thought the bottom was already in this market.
There is no question that a bottom will happen at some point in time. As I've pointed out before, however, with harvest running behind normal and the long-term cycles pointing to lows later in the year, it's very likely that neither corn nor soybeans will establish a significant bottom until November.
My firm's downside objective in nearby corn futures for more than a year-and-a-half has been $2.70-3.21. As I wrote this article, nearby September corn futures were only 9 cents away from the first objective. Somewhere in that price range, I think corn prices will find a bottom.
For November soybean futures, my firm's long-term objective has been $8.80-9.20. At this point in time, I am not confident that the low end of this range will hold this drop. The market is going from one of the most bullish fundamental years to possibly the most bearish fundamental year in history. In this environment, prices can overextend dramatically.
Will the 2014 farm bill be of any help? Not very likely.
Producers who have been hoping for a favorable crop insurance program to help bail them out of poor marketing decisions are not going to get it.
The Price Loss Coverage currently looks as though the price floor on corn futures will be $3.70/bu. In soybeans, that floor will be $8.40/bu.
With many producers in the Upper Midwest thinking that the solution to low prices would be to build more grain bins, the combination of more corn and soybeans going into storage and the lower-than-expected support prices from crop insurance will prove to be a ceiling, not a floor. This is, unfortunately, painting a picture for an extended period of very low corn and soybean prices.
So, what should be the strategy going forward? It is pretty simple, actually.
For producers, we have been 80% sold for several months on both the 2014 and 2015 crops.
For buyers of corn and soybean meal, why be in a hurry? If there is a substantial exhaustion in October and November, then it may pay to be aggressive, but at this stage, just sit back and wait.
*Richard A. Brock, president of Brock Associates, has been publishing "The Brock Report" for more than 30 years. He leads the Brock Associates team and is responsible for the development of marketing strategies. Brock also serves as a commodity marketing adviser and price forecaster to many of the nation's largest agribusiness firms, food companies and financial institutions. He can be reached at [email protected].
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