July 29, 2014
Close July 29
2 week change
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Grain markets were mixed over the last 2 weeks, which is a minor victory considering the massive slide in corn and wheat prices since early May and in soybeans since the June 30 USDA acreage report. If what goes up must come down, then what goes down must come back up eventually, right?
As is always the case this time of year, weather factors dominate. It has been a cool summer through most of the Midwest. June was wetter than normal in the northern and western belts, and has turned noticeably drier in July. The eastern belt, including Ontario has also had below normal temperatures with mostly adequate rainfall.
Generally soybeans do better with a drier June and wetter July, than the way things developed this year. Soybeans have also tended to yield better in years where temperatures were slightly above normal than below. Will soybeans then end up nearly 3 percent above their all-time record as USDA predicts? August weather will have the final say.
The first 2 weeks of August look to remain cooler than normal. This will slow crop development and increases the risk of damage from an early frost. So far, the market has remained unconcerned. Corn and especially soybean acres are large, so there is room forsome yield losses, should they occur.
The trend is your friend, and no one adheres more to that adage than the large speculators. They are now short more soybean contracts than any time since 2006, when the current grain bull markets started. They have sold over 200,000 corn contracts or 1 billion bu since May, while they hold their second largest short position ever in wheat.
There is no doubt this speculative selling is a major contributor to the current depressed price levels. However, as long as prices do not rally, they have no incentive to change course. Right now it is hard to see where that spark might come from, but it will come.
History shows that about 70 percent of the time in large crop years, prices bottom before or at harvest. This is because it is a futures market, and all the negative news eventually gets priced in. Then the focus turns to the demand side and South American weather.
One thing I have learned about markets is that if you stick to your story long enough, you will eventually be right. Prices have exceeded my downside targets, but that means we should be closer to the seasonal low now more than ever, right?
The one plus from the current bearishness is that input prices are also likely to ease. The correlation between grain prices and inputs has never been stronger. There is little to no chance of an interest rate hike either. This is causing more dollars to flow to the stock market. The Toronto market gained another 2.6 percent in the past 2 weeks. ♦
- Frank Backx, HDC Forest Location Manager