Not much difference of opinion about the grain markets these days. Read any newsletter or any internet column, and the conclusions are the same: The markets are going down. From the tone, one would think corn is going to zero!
One old axiom of the grain business is that the trend is over when all the traders agree that it’s going to continue. In the current market, that means that once all of the traders agree that the market is going to keep going down, it will stop moving in that direction.
The reason behind this is that there has to be a buyer for every seller for the market to work. By the way futures contracts are traded, no one can sell a contract without selling to another who is buying it. When everyone agrees the market will go lower, you can’t find a buyer to complete the trade.
Going down
I think of this as I read an article on Farm Journal’s Ag Web about the crashing of markets July 15. Michele Rook writes of the sick trading that took place today, and asks if this is going to be another 2014, when we also had a down market as we got into the summer months.
No doubt about it. July 15 was a bad day. Soybean futures lost 25 to 28 cents, depending upon the contract, making new contract lows in the process. That is not recent lows, but contract lows.
Corn futures lost 10 to 12 cents. Chicago cookie wheat made new contract lows, down 12 to 20 cents. Yuck! (That is a technical term.)
Markets are falling because much of the trading is being done by the spec funds, and the spec funds keep adding to their short positions. The funds are now net short, in futures and options, 353,983 contracts. This is a new record, up from 340,732 contract. It is a record we could do without. The same funds are now short 172,605 contracts of soybean futures and options.
Open interest
A good measure of market activity is what is called “open interest.” This is the total of all futures contracts in existence, both by specs or by hedgers actively involved in the cash grain business. It counts each side of an open, not off-setted trade.
Open interest is also at a record for corn and soybeans, at 3.08 million contracts. These statistics are publicly known, as regulations require them to be reported.
Because traders that might want to buy this market, like processors, they have reason to think that the market is still going down, they are just buying hand-to-mouth. That is, they are not taking any long-term positions, but are just buying immediate needs.
This is a market that is filled with traders who believe the worst is not over. They either want to short it, if they are speculating, or just buy what they have to if they are cash users. What can happen in this trading scenario is that the worst keeps getting worse.
The move down can actually accelerate right up to the point that it runs out of buyers and has to turn around. Even though the specs are in the minority, they can have an outsized impact on the market at a time when fundamentals are weak or suspect.
Reasons
There are good fundamental reasons why grain prices are cheap and getting cheaper. The perception of market players is that the crop is good and getting better. Early talk of excess water problems in the Northern Corn Belt and drought problems elsewhere has gone away. That does not mean there has not been damage to crops, but there is always damage to crops here and there, even in record years.
Add to the warm, but not hot (unless you are in Alabama with me, where it is hot) weather we are getting, the fact that current weather systems, especially aided by the recent hurricane/tropical storm that moved rain into the Eastern Corn Belt, are providing continuing weather good for the crops.
Remember that the U.S. Department of Agriculture in June told us that we planted more corn than expected, and you have a market determined to bet on a big crop, added carryout and grain prices less than cost of production. Selling at less than cost is a disaster we don’t want to think about, but must soon face.
There are reasons to not believe in huge crops. According to USDA, we added to corn acres, but subtracted from soybean acres. Yet, we only seem to be trading the corn acres. We have most of the summer ahead of us for something to change.
Against that thinking is the fact that we rarely fire up a big drought pattern late, and much of the corn will soon be beyond the stage that a new dry spell will ruin. Time to kill the corn crop is running out.
For soybeans, the yield is made in August, if you want to bet the farm. Of course, if you don’t have a slug of grain sold at prices from a couple of months ago, you have already bet the farm, whether you intended to or not.
We did have a good July 11, with a technical rally after setting 3 1/2-year lows in corn prices. Then, we had the bad drop July 15. Monday night, we had September corn futures bouncing off the bad day session by almost three cents, at $3.93 1/4. It doesn’t seem like that long ago we were close to $5 and hoping we could get there.
Now, at 10 p.m., we have dropped September corn futures 95 cents in a little over two months, and the end may not be in sight. The low came earlier in the day July 15 at $3.89 1/2, and we got down to $3.90 so far in the overnight. The recent high was at $4.84 1/2 May 14.
November soybeans, which I am watching even though the lead month is still August, was trading at $10.37 1/2 as this was being written. That is a bounce of almost four cents since the day session of trading. The recent high was May 7 at $12.30 1/2. The recent low came earlier July 15 at $10.38 1/2. The ugly articles I am seeing tonight question if we can remain above the round number of $10.
September Chicago wheat futures were trading at $5.33, up just a half so far on the overnight. As recently as the May 28, we had a high of $7.39 1/4, but we had a low earlier tonight at $5.30 1/2. That means we have lost more than $2 in less than two months. Again, yuck!
