On September 6, the headline of The Brock Report was “Grain Prices Have Bottomed.” At the time we doubt many people believed that statement. As time now progresses, more and more are becoming believers.
As in all commodity analysis there are three factors to watch:
1. The fundamentals. How to read a balance sheet.
2. Technical analysis. How to read a bar chart.
3. Human psychology. Understanding how people are going to react to market price movements.
The fundamentals in corn, soybeans and wheat have been easy to read. For example, if you look at the balance sheet for corn, the estimated average price is $4.00 to $4.40. Two weeks ago, central Corn Belt cash prices were trading at approximately $3.60. Clearly, that value was well under the expected average price. Also, in that Sept. 6 issue we included the seasonality’s for when both corn and soybean prices normally bottom. In both commodities, if the market is making its seasonal lows in August, the last month of the marketing year, then the odds are very high that the following marketing year the lows are going to be made in September. Thus far, all of this is holding true.
U.S. net global ag trade has declined sharply in the last three years. This year will likely be the largest agricultural trade deficit in the history of our country. That’s why prices are as low as they are.
U.S. share of world exports in corn, soybeans and wheat are also near the worst levels in history. In the 1994/95 marketing season, U.S. farmers had over 80% of the world’s corn export market. Now their share is at 29%. Soybeans exports have gone from over 70% world share to under 28%. Wheat exports have gone from approximately 34% to under 10%.
Technically, on August 30 corn futures had a five-wave buy signal. In an extremely underpriced market, the market will then typically act like a boomerang and react quickly to the upside. That has occurred. A few days later, corn, soybeans and wheat were all breaking their long-term downward trendlines. The turnaround was becoming more and more obvious.
Why Are Prices Turning Around Now?
Consider the following:
1. The value of the U.S. dollar has declined sharply in the last month. This is partially due to the Fed’s half-point interest rate cut. Whatever the reasons, when you combine the low levels that commodity prices have fallen to with the weaker value of the dollar, U.S. agricultural commodities on a worldwide basis are now some of the lowest-priced in the world. Good value for the money.
2. Buyers are not covered. Human nature never changes. Prices have been in a two-year bear market in the grains and so the average buyer, including buyers for foreign countries, sits back and becomes convinced that the market is not going to turn around. Why get in a hurry to buy if the market is cheaper almost every day? Once the buyers realize that the market has turned and is headed higher, they will scramble to get their needs covered. There will not need to be a formal “announcement” that prices are going higher or any fundamental reason why. It’s human nature to wait and when everybody reacts at the same time, prices go into a vacuum and are pushed higher.
3. While the U.S. stocks-to-usage ratio is near an all-time high in corn at just under 15%, the rest of the world has declined. China, for example, has gone from a 90% stocks-to-usage ratio in 2015/16 to approximately 65% as of now. They maintain a high ratio for food security. The world, excluding China, is at 10.8%, down from nearly 16% in 2016/17.
4. At current low-price levels, one would have to assume that planted acreage of corn and soybeans worldwide will likely be down in 2025. Inventories will start to decline.
5. As has been the case for most of the past year, large speculators are holding a large net short position. They have started to cover those positions, and as the reality of a bottom in the market settles in, that short covering will pick up speed.
How High is High?
Don’t worry about it right now. Just recognize that the bottom is in. The market may not be going up a lot but it is done going down. That is the important point. Note, on the monthly corn and soybean charts, prices have stopped above major long-term support. The next resistance level in soybeans doesn’t come in until nearly $11.50 per bushel on a weekly continuation chart shown on soybeans, and corn at approximately $4.50 per bushel as shown on corn.
On page 6, note that December corn futures are in the process of breaking out to the upside. Also note that near the bottom, open interest collapsed and in the last two weeks open interest has risen significantly. Why? Most likely new buyers coming into the market recognizing that a turn in prices has already occurred. As pointed out in the Sept. 6 Brock Report, a 30% retracement in December corn would rally the market back to $4.21 and a 50% correction to $4.39. The end of this rally will likely occur somewhere in between those two prices.
In November soybeans the market has already surpassed a 30% retracement and a 50% retracement would take it to $10.91. Those are all reasonable targets.
Putting it all Together
Sellers of grain should put the grain in storage. Unless you need cash right now, there is more upside potential than downside risk. If you want to be conservative, with cash corn prices in most areas under $4.00 and July futures at $4.47, sell July corn and sit on the cash corn and watch the spread come in. Good return to storage.
Soybeans are similar. Cash beans are near $10.00 per bushel and July futures are at $10.98. The storage return will work.
