In my May article, I discussed that I thought the markets were moving from the left side of the price curve to the right side of the curve, as shown in the graphic below. Once the market peaked, buyers started backing away, giving the appearance that demand was dropping. The reality, however, was that buyers were more aggressive on the way up. This led to an exaggeration of how strong demand was, and now, the whole process reverses. This is the way supply driven bull markets have always worked.
The price moves we have witnessed are hard to believe. Consider:
- Corn futures were $3.25/bushel a year ago and recently peaked over $7.50. Soybeans went from $8.50 to over $16.50. Wheat from $4.75 to $7.75. Hog futures went from $45/cwt. to $120/cwt., and cattle futures from $85/cwt. to $122/cwt. That’s about as much change as most of us can emotionally handle.
- Now write down on a piece of paper where these markets will be a year from now. Our guess is that all of these markets will be lower.
The bigger picture
For those of us beyond middle age, there are many historical bull markets to learn from. The years I am referring to are 1973, 1980, 1985/86, 1988, 1996, 2008, 2012 and now the period we are in, 2020/21.
The most important year of all was likely 1973, the year of the Russian grain heist when corn prices went from a dollar per bushel to near $4.00 per bushel and soybeans went from $3.00 to over $10.00. 1985/86 was the period of the biggest financial crisis in agriculture as many producers and agribusinesses as well as bankers were faced with career changes. That was not a fun time. Most of the others were weather markets. That brings us to the present. This started out as a demand driven bull market with China buying aggressively in both corn and oilseeds. Then it turned into a weather market that has recently been “rained out”.
There will undoubtedly be some weather scares in the grain markets during July and August. Any type of “drought” concerns may result in a short, sharp rally, but we should not overlook the fact that all the grain markets have made major tops. Buyers should not be aggressive.
The key question for the markets now is whether or not China will come back as a major buyer. The recent change in their purchasing is likely a long-term change, and our estimate is that they are going to continue to need more corn for their rebounding pork industry. They will likely become a regular buyer.
An additional question to ponder for the longer-term is whether or not increased Chinese buying of U.S. corn be enough to offset reduced corn-for-ethanol demand domestically as the U.S. auto fleet shifts more and more towards electric vehicles over the next 10 years? The shift toward electric cars will be slow but steady, but the end result is becoming fairly clear. We believe that increased demand from China will likely offset the losses from ethanol demand.
Another factor that may impact the corn market is whether or not the “climate change” crowd will be able to convert millions of acres of corn to cover crops? There will be some shift, the question is how much?
The bottom line: The changes we have witnessed in the last 12 months are likely only the beginning of more changes to come. We all have to adapt to the new environment.