So who’s going to win the race between the drought ravaging Midwest crops and the highish prices killing demand?
That’s the questions getting thrashed out right now in the markets, with two major factors pulling on prices from opposite directions.
The USDA this morning released its World Agricultural Supply and Demand Estimates, and at first the market went all bullish, but at this moment has given back most of the gains and corn has even dropped into the red numbers for a bit. (Funny, I wrote that last line an hour and a half ago, got a phone call, went for lunch, then came back to crop prices having fallen well into the red. How things develop!) The debate among traders, analysts, economists and farmers is whether the shrinking U.S. (and Former Soviet Union) crops is the elephant in the room, or if it’s high prices causing demand destruction.
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USDA gave support to both positions today, with it slashing both expected U.S. corn yield and world demand. So which is going to be the bigger factor?
Is most of the drought damage already factored-in to prices? Is demand destruction picking up speed but not factored-in yet? Will prices have to rocket higher in order to cause significant demand destruction? Or are prices high enough now to do the trick and bring back some balance.
All gotta be thunk out.
Which is what’s happening in the chart below, as the traders hammer prices around figuring out what the big deal really was in the USDA numbers. This is December Chicago corn futures. Notice the pop after the report release and then the relentless dropping.
That’s what’s happened today.
Interesting that the bears have so far won this one.
There’s no doubt the U.S. crop is shrinking further. And there’s no doubt demand is already being kaboomed, as with the dropping demand for corn for ethanol production.
To me the biggest question mark hangs over soybeans. Soybeans aren’t yet in a critical state for yield setting, so there’s time for it to recover. But if it doesn’t get good rains soon, it’s carryout will collapse and then things could go all Chernobylish. Prices would have to go much higher – relatively – to kill demand if soybean yields get reduced much at all in the coming weeks.
Anyway, it’s been an interesting day to watch the price action and try to figure out what’s really happening.
As always at these sorts of times, let me suggest farmers think about hedging while we’re in such a high-priced and volatile environment. As you can see above, the same situation can be used to go bullish – the first few minutes of trading – or bearish – the rest of the day. Put options could work very nicely right now, giving downside protection but allowing a soybean-inspired rally to take prices much higher.
Prairie farmers are overseeing what could be big crops coming into the bin in a couple of months. Let’s hope this wasn’t the top of the market and we peed it all away.
