Farmers and grain traders were amazed at the size of the U.S. corn and soybean crops this year. As one elevator manager from northeast Illinois told me, “I will never believe this drought scare stuff again.”
The most recent USDA production estimates suggest a U.S. soybean crop of 2.967 billion bushels, and a U.S. corn crop this year of 10.850 billion bushels. With these large supplies, the market's job in the short term is to get prices low enough — for a long enough time period — to stimulate demand, reduce production in other parts of the world and buy our way into new markets.
My estimate is that it will take at least two to six months, but these current low prices and large crop will eventually create the next bull market.
All commodity markets are cyclical and these are the three phases I see unfolding in the next 12-18 months.
Phase one: Prices have to go lower. The news is all negative and we have such a huge crop that we cannot find storage for all of it. I've seen all of those negative factors so often in the last two to three weeks that the bottom has to be close. Remember, the fundamentals are always negative when corn futures are below $2.10, and soybean futures are less than $5.60. The attitude is always the most negative as prices bottom.
Phase two: Prices can't go much higher. We still have a huge supply, and demand just is not that good. As the down trend changes into a sideways trend or into an uptrend, most of the traders and farmers will stay skeptical of the rally and will often turn into willing sellers. This evolving uptrend is when demand is usually understated and domestic and global usage runs well above USDA and private forecasts.
Phase three: Prices have to go higher. That's usually the mentality when prices soar higher. Also, the rally is often tied into some type of weather scare. Farmers turn into reluctant sellers, end users often panic and begin buying ahead. Prices move sharply higher on increased trading volume.
These are three key signals that I will watch for that will indicate a bear market in corn and soybeans is coming to an end, and that prices are likely to start moving higher again.
Domestic and export demand increases on a weekly and monthly basis with USDA reducing ending stocks on a monthly basis as usage exceeds earlier projections.
Global production of competitive supplies begins to decline. Reports out of Brazil suggest this is already starting to occur as current projections suggest a 5-10% drop in planted soybean acreage with input purchases down 20-30% from last year.
The chart signal I'll watch for is the first month that prices close above the two previous months' high. That could be as soon as January or as late as July, but when that chart signal is given a long-term low will be confirmed.
To be successful in marketing you need to be disciplined, have a game plan and be aware of the three phases that all commodity markets go through. If you think of the rally in terms of dollars per acre — not in cents per bushel — it makes selling into the rally easier.
If you have a sense of history, then you'll realize that the next rally is likely to develop by the spring or summer of 2006.
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.