In its July supply and demand report, the USDA lowered its estimate for 2015 ending corn and soybeans by a combined 175 million bushels, sending futures prices for both commodities higher. It’s just the latest shift in what has been a historically volatile market.
Coming into the year, expectations for corn, soybean and wheat markets were bearish following 2014’s bumper crop, and all signs pointing to another year of high yields. Wet weather throughout the spring and early summer, along with a range of other factors, has changed that outlook. In fact, the May-June period was one of the most volatile in the history of all three markets.
We need look no further than the last week of June, when corn and soybeans twice broke records for the most combined futures and options contracts traded in a single day. The Chicago Soft Red Winter Wheat record for combined futures and options was broken once, on June 26. Corn and Wheat futures have traded since 1877, soybeans since 1936.
In that long history, we have seen plenty of volatile markets, and certainly plenty of rainy seasons. What makes this one unique?
For one thing, record-breaking rainfall has hit crops across an unusually wide stretch of the country’s grain producing regions. That served as a likely catalyst for widely held expectations changing drastically and quickly. Funds who held positions in corn, soybeans or wheat were almost universally short those markets. When it became clear that rains across the plains and cornbelt were having a real effect on crop conditions — delaying planting or washing out acres of corn and soybeans, and damaging wheat crops ready for harvest — participants exited their short positions in a big way. The latest crop moisture index from the National Oceanic and Atmospheric Administration shows normal to wet conditions across nearly all of the primary wheat, corn and soybean producing states.
Steve Freed, Vice President of Research at ADM Investor Services told us he believes it was not only a move from short to long positions that brought on the late June volume records.
“Farmers in U.S. and South America were very active sellers of old crop supplies. I think that added to the volume,” he says. “There was a big change in ownership from the fund short to the commerical short, and it was pretty dramatic in a short period of time.”
There are other factors besides weather at work, as Freed’s statement implies. Today’s grain markets are more sensitive to global events and movements in other commodity and financial markets. Countries across the globe count on imports of U.S. grain. But when price and supply are more favorable in Brazil, for example, the effects are felt on U.S. markets. Everything from Brazilian weather to Chinese stock markets will impact corn, wheat and soybeans here. A strengthening of the U.S. dollar recently suggests a possible impact on U.S. exports. Not all of these markers are telling market participants the same thing. Some amount of all of these things has led to uncertainty, which leads to volatility.
“You’ve got some very smart analysts looking for higher prices because the crops are going to get smaller here, and you’ve got just as smart analysts thinking ‘OK, we’ve traded all that, it’s time to go lower as long as weather doesn’t get worse,” says Freed.
With a market affected by so many economic ripples elsewhere, uncertainty seems likely to stay. However, Freed says weather remains the first factor to watch. “Every day is different, but the number one thing participants normally trade is weather.”
Dan Basse of AgResource Co. also tells us after the recent rains and USDA reports, weather will tell the story of of where grain and oilseed markets go next.
“Unless there are additional weather problems, you’ll see the money that came into the market long leave the market. We need additional crop losses to maintain the bullish trend,” he says.
A cooler and wetter-than-usual July is forecast for parts of the Midwest, and the next USDA report is August 12. Stay tuned.