Market analyst: Grain rally continues despite lack of trouble

Ray Grabanski
Special to the Farm Forum
Columnist

Grain prices continue their torrid rally despite little sign of crop trouble in the U.S.

In fact, forecasts have moderated considerably so that we now have a cool and wet forecast for the next two weeks in the Corn Belt. Planting progress is ahead of normal in just about every crop now (even warm season crops like corn and soybeans), so planting delays are not a worry, either. So why is the market still rallying?

One reason is that funds are rumored to own about 1.96 billion bushels of corn and 905 million bushels of soybeans in a speculative long position. Essentially, that is about 2 times the corn carryout and 8times the soybean carryout projected in the US. So if corn and soybean users want to buy corn, they have to pay what the speculators want to get out of their positions.

But then again, if funds are trying to liquidate their 1.96 billion bushels estimated long position in corn or 905 million bushels long position in soybeans, they’d do it by goosing the trade late in the rally to get everyone bullish. Is that now? Then if the news becomes all bullish, which it always does when the market goes up, lots of people want to buy the market. We are starting to get that feel, as now farmers, speculators and others want to buy $7 corn and $15 soybeans.

If you were a speculate long who owned 1.96 billion bushels of corn and 905 million bushels of soybeans (more than the entire carryout), how long would you continue to squeeze the market? You have bought since May 2021, the pandemic low, at prices lower than $3.50 for corn, $9 for soybeans and $5 for wheat and have kept buying until you pushed the market in one year to virtually 50% or even double the beginning levels. You knew the U.S. Department of Agriculture was sandbagging demand and supplies were smaller, and you capitalized. But the problem if you wait until no one wants to buy is that you own 1.96 billion bushels of corn and 905 million bushels of soybeans to liquidate — with no buyers. So you have to sell when everyone else is bullish. Guess what? I don’t know hardly any farmers who are bearish, or anyone else for that matter, who has listened to the agriculture news while this market is blowing the top off prices.

Don’t forget, when the funds sell their 1.96 billion bushels of corn and 905 million bushels of soybean position, the market will turn from a shortage to a surplus. The market cannot absorb that kind of selling in a short time. No one knows when they end the tight squeeze, but usually that forms the market top.

If you’ve wondered how, for example, how hard red spring wheat went from $6 to $25 in 2008 and topped in February when supplies were more plentiful than summer, it was because the funds liquidated their considerable long position to cash in on their long-term ownership. Sound like familiar territory? When price has allocated the short supply by going high enough, and the funds get paid for being right, then the shortage is over. Our job as producers is to sell something when prices are still good. Does that sound like now?

Weather is the same as it has been since mid-January, mostly cool and wet for most of the U.S. The U.S. drought, which began last July and August, ended four months ago, and the drought index has been shrinking ever since. It’s hard not to with below-normal temps and above normal precipitation — the forecast for the next two weeks as well. In fact, it has shrunk so much that virtually the only state with bad drought left is North Dakota. And North Dakota and Montana are forecast to get more rain the next two weeks than they’ve had in almost a year. Temps are cool, so this is the week you want to get everything planted in the dust and your pockets will bust, as the old wheat traders saying goes.

Winter wheat, despite freezing temps, has gotten so much winter and spring rain that yield potential is above average at 50.77 bushels per acre (our yield model), above the 50.56 trend yield, but down 0.07 bushels this week. Planting of spring crops is ahead of normal for virtually everything, with even corn now 46% planted (10% ahead of normal) and soybeans 24% planted (13% ahead of normal). In the coming week, with ideal soil moisture and temperatures for planting, we are likely to move even further ahead of normal, and an above-trend yield will become more likely in 2021 for corn and soybeans. Cool season crops are even further ahead of normal — it was cool to start the season, not droughty weather — with sugar beets 81% planted (30% ahead of normal), oats 72% planted (10% ahead), spring wheat 49% planted (17% ahead), and barley 53% planted (12% ahead).

With generous rain forecast to fall in the coming two weeks on what is likely to be most of the crops already planted, we will have the perfect germination situation and a great start to 2021 with more drought shrinking.

So if you were the fund who made billions owning almost 2 billion bushels of corn and 1 billion bushels of soybeans from $3.50 corn and $8.50 soybeans, when would you take your considerable billions in profits? Who is going to buy the huge stockpile of grain you own? Of course users will, but you better not get the price so high that ethanol plants shut down and call your bluff. You don’t want to own it when prices get so high there are no buyers left. Note your deadline is harvest 2021 when another 15 billion bushels of corn and 4 billion bushels of soybeans come online. So when do you get out? The answer is exactly when you want to be selling 2021, 2022, 2023 (and maybe 2024) crops, as when they spit out the 2 billion bushels of corn longs and 1 billion bushels of bean longs, there aren’t enough buyers to offset.

Get ready for more “volatility”, which also spells opportunity for farmers.

Ray can be reached at raygrabanski@progressiveag.com.