You would think we would be used to these radical changes of direction by the market after the past two years, but they still cause me whiplash. Just when all the fundamentals seemed to be so bearish on soybeans, it seems like everything turns. Like dominos falling one after the other, first USDA does not raise US yield as the market expected, then we hear about a lysine shortage that will increase soybean meal demand, now we see dryness developing in Southern Brazil/Northern Argentina. Beans have rallied a dollar off the lows.
In a normal year the best we can hope for from our fundamental analysis is to get a brief picture of the direction of the market sometimes. The way the markets work is to take all the information in the world, everyone’s prediction of what is going to happen in the future and a good dose of human emotions like fear and greed and put it all in a blender and mix it all up and spit out a few numbers. Market analysts then take that number (eg price of soybeans) and try to deconstruct it to guess what it is telling us. No one person knows with certainty what went into that number so we are certain of even less about what it is telling us. When the market makes a big move we all want to know what caused the move. We can usually point to a few likely main causes, but we never know with certainty. This is far from a normal year. Not only do we have wild swings in carryout estimates, but we also have way more money chasing returns trading in the markets and also heightened human emotions also adding in.
I am not writing this to discourage you from reading any analysis, there is still value in analysis even if it cannot predict the future. We have to take the number the market is giving us and make our marketing decisions. The period of low prices that we just came out of was stressful for all of us because we had to fight to make a profit on the farm. We had a great year this year as prices and yields were both up and inputs were similar to last year. In a good year or bad year there are never many decisions that are easy and now with inputs higher even higher commodity prices are not going to guarantee us a profitable year. There will be even more risk now. Use fundamental analysis to help develop your marketing plan setting objectives as to where you are going to make sales. Your plan is not set in stone, make adjustments as often as you need to but keep pricing levels in mind. Scale in sales. The market is never going to give you a price that you are going to want to sell your entire crop. If you wait until you are ready to sell your whole crop at one time, you will never sell it.
Now back to the fundamental analysis on beans. What has changed in a month from gloom and doom to a dollar rally. We have seen demand continue to strengthen. The market was so focused on an increase in supply when it was dropping, now we have had an increase in demand to help offset. The US crop was getting bigger and South America had planted their crop in good conditions in record time. China was not buying from us. We have been talking about La Nina for over a year now but had not seen a lack of moisture in South America yet. Now we are starting to see dryness build in some regions of South America. The two biggest wild cards we have right now are South America weather and Chinese demand. We at least think we know what the upside potential is for US domestic demand. We have almost no clue about the depth of Chinese demand. If we get a scare in South America on weather or see a big uptick in Chinese demand it is going to attract more fund money and it will be back off to the races.
What To Do
I hope you scaled in a few sales around 1250. Now what is our next target? I would work orders just below $13 to scale in some more sales. That level looked unobtainable a few weeks ago but is now in our sights. No matter what happens this winter, with higher input prices beans are still going to have an easier time attracting acres so we need to be more aggressive in selling new crop beans than new crop corn as well. Scale in new crop sales as you make old crop ones.
Underlying the corn demand is energy prices. Corn would have traded in a much closer pattern to beans had we not seen such a rally in energy prices that provided record profitability to ethanol plants. We did make more corn this growing season due to the late season rains in much of the growing area. Crude oil went to negative prices last summer and recovered back into the 80s. So many US production was shut down and will take time to bring it back online. OPEC does not have a monopoly on production long term, but they do in the short term until we get our production back online. They plan to milk all they can out of that period so i see no reason they will act to lower prices until they threaten the world economy. Ethanol producers stand to benefit and therefore so do corn prices.
What To Do
I think our objectives on corn can be $5.80 and above. I think we will get back over $6 on the board but do not see it happening until Dec goes off the board. End users are probably going to be quick to jump in and buy any breaks so the market should stay supported. Like all logistics, trains are running very poorly. Feedmills can buy midwestern corn relatively cheaply right now, but they do not know if it will show up on time. They are very hesitant to post a too high of a basis for trucks, but know they will have to pay one when the train is late. If you have to move corn in Jan, shop the basis there are some good bids if you know where to look. Rail values should be working higher now that we are all but done with harvest. Be patient on new crop corn as it is going to have a harder fight than beans for acres.
Wheat remains very political and with threats of inflation will remain so for quite some time now. Once Chicago wheat finally pushed through the $8 resistance, it found some quick upside. Tuesday was a reminder about how quick the market can react. There was a rumor on Tuesday that Algeria cancelled a tender of wheat and the market dropped 16 cents on the day. After the close, we learned the rumor was false that they had just delayed the tender in question and actually bought more wheat at a higher price. The next day wheat recovered and has been working higher since. Countries that produce wheat are trying to slow exports to keep a lid on prices and countries that import wheat are trying harder to secure supplies to keep prices from going up any more. A change in Russian export taxes or a tender by Egypt can cause a big move in the market. Fundamentally, it is very dry in the wheat growing regions. The market is trying to attract acres but higher inputs are taking off some of that. It was very wet in the eastern corn belt so we do not know how many acres they were able to plant in that region. Wheat should stay supported based on just the fundamentals.
There have been very few times in our lives we sell wheat over $8. If you are growing wheat this year, you need to get some priced. Do not sell your whole crop, but get some done. Like we say with each sale, let’s hope it’s your cheapest sale.
Cotton has had the biggest disconnect between what we see as the fundamentals and what the market has done. The crop in the US continues to get bigger but yet the market has not slowed down. There are some issues overseas that we can see, but I struggle to have a rational explanation for $1.20 cotton with what we know. There is something else driving cotton and it seemed to have sparked around the same time China started dealing with the Evergrande meltdown. I cannot tell if it’s due to the region of China accused of slave labor and being shunned by some retailers or something else but there is something else driving cotton here. If you have bales to sell, you need to be selling at these levels. Old crop is the leader and is pulling new crop up with it and should be poised to attract a lot of acres for next year. I would also be selling some new crop bales above 90 cents.