Corn and soybean futures put in impressive rallies from the low posted in late November 2005 to the early January high in 2006.

The CBOT corn continuation chart shows a 35¢ rally from the $1.86 low to the $2.21 high. Soybean futures show an impressive 77¢ rally from the $5.45 low to the early January high at $6.22. Once the index long-only commodity funds stopped buying, prices dropped back to test the November lows.

These are four negative fundamental factors for the corn and soybean markets.

  1. Improved weather is creating a larger corn and soybean crop in South America. The current projections suggest a corn crop that is up about 1 Million Metric Tons (MMT) from last year and a total South American soybean crop that is up 7-8 MMT from last year.

  2. Slow soybean exports are running 25% behind last year. This 5 MMT drop in export sales is one of the main factors increasing soybean ending stocks to more than 500 million bushels.

  3. The bird flu scare has resulted in a slow down in meal and corn exports. While the actual number of chickens killed is insignificant, the potential negative impact is being priced into the futures markets throughout the world.

  4. The large crop harvested in the U.S. last year and the record inventory farmers are carrying will limit rallies in the cash and futures markets.

These are three positive fundamentals factors for the corn and soybean markets.

  1. Low soybean prices eventually will stimulate demand. Planted soybean acreage in South America is down 2-3% from last year. With the current low soybean futures price and strong Brazilian Real, odds are good that there will be limited expansion in South America next year. With growing global soybean demand, the large inventory numbers that have forced prices down may not be around next year at this time.

  2. The most negative numbers usually get priced into the futures market right at the low. The annual USDA outlook conference came out with a series of negative fundamental reports. These reports suggest record carryout stocks and are the types of reports that have a history of putting in a low.

  3. A weather scare rally is likely to start right ahead of or during the spring planting season. The U.S. Drought Monitor map still shows a huge dry area in the central and eastern Corn Belt. Too much rain at planting usually rallies prices, and if it stays dry in the central Corn Belt odds are good that prices will rally. That's why you just about always get better selling opportunities in April-June than in February and March.

Four Key Signals

They don't ring a bell at the top or bottom of the grain markets, but these are four signals that I'll be watching to see that prices have bottomed.

  1. Watch cash basis bids. Usually as prices bottom basis levels improve as end users step up to lock in the low cash price. As futures approach a major low, cash prices will often stabilize or move higher even as futures prices continue to fall.

  2. Watch the carrying charge spreads. With record corn and soybean inventories, the market has built in large carry from one month to the next with July corn futures trading at 10¢ over the May corn futures. July soybean futures are also trading 10¢ over the May soybean futures. When that spread starts to narrow it's usually a positive price signal.

  3. Watch the market reaction to a negative report. If USDA comes out with some really negative fundamental reports, and the market closes higher the day after those reports it's a signal that all of the negative news is built in.

  4. Watch the chart action. A Friday-to-Friday higher close by nearby corn and soybean futures in late February or early March is often a signal that prices have bottomed. The confirmation that prices have bottomed will occur the first time prices close above the previous months high.

Soybean prices adjusted for inflation are at some of the lowest levels since the major 30-year lows of 1969 and 1999. When soybean prices are within 1-2% of all time lows anyone with a sense of history should realize that it's dangerous to become too bearish at the bottom.


Alan Kluis is executive vice president of Northstar Commodity Investment Co. If you have marketing questions or want information, write: Northstar, 1000 Piper Jaffray Plaza, 444 Cedar St., St. Paul, MN 55101; call: 800-345-7692 or e-mail: aginvestor@agmotion.com.