Grain trade ponders, 'How low is low?'

Grain trade ponders, 'How low is low?'

Even disbelievers who felt corn and soybean prices could not go lower a few months ago have to be waking up to the reality that corn and soybeans are in major bear markets.

Even disbelievers who felt corn and soybean prices could not go lower a few months ago 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 The laws of economics have not been repealed.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 will almost always go lower than anyone can possibly anticipate. We do not have a shortage of $8.50 corn, and even though we will not likely have a surplus of $3.50 corn, that doesn’t mean it can’t go much lower.

The September crop report has now taken the wind out of the sails of anyone who already thought the bottom was in this market. No question a bottom will happen at some point in time. As we’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.

Our downside objective in nearby corn futures for over a year and a half has been $2.70 to $3.21. As I write this article, nearby September corn futures are only nine cents away from the first objective. Somewhere in that price range I feel corn prices will find a bottom.

For November soybean futures, our long-term objective has been $8.80 to $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 Farm Bill be of any help? Not very likely. Producers who have been hoping for a favorable crop insurance program to help bail out poor marketing decisions are not going to get it. The Price Loss Coverage (PLC) currently looks as though the price floor on corn futures will be $3.70. In soybeans that floor will be $8.40. With many producers in the upper Midwest thinking their solution to solving low prices was 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 and 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 get 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.

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