A new marketing era is about to begin. Freedom to Farm is dead and more volatile prices lie ahead.
The above headline sounds like alphabet soup and doesn't seem to make any sense. But it does.
It stands for: Lower Carryout plus Farm Bill equals Wild Price Swings. What it also means is the marketing era of 1996-2001 is almost over. We're now starting a new one. Everyone will need to adjust to a new thinking cap for marketing strategies and reassess some old rules of thumb to see if they're still going to work.
Since the end of June, the corn/soybean market has given us a good example of what to expect — volatility. Political maneuvering on the Farm Bill will add fuel to price movement similar to weather forecasts. While many will be hopeful that a new Farm Bill will be bullish on commodity prices, let's not forget some of the basics. One of those is quite simple — short crops peak early and have a long tail.
Short Crop On The Way
As this is written, corn and soybeans are in the midst of a major upward trend, propelled by scattered weather problems. By the time you read this the bull market in both corn and soybeans may well either be just over, near completion or about to be over. Why?
Consider The Following:
Short crops peak early — normally just before, during or right after harvest. This is simply because supply-driven bull news is easy to see, easy to quantify and thus quickly gets discounted into prices.
News is the most bullish at market tops, and the majority of your neighbors in the coffee shop, who were bears in early June, will now be in the bull camp.
Many of the die-hard bulls near the end of a supply-driven bull market will start talking about the market “switching to a demand-driven bull market.” While this may be true, demand-driven bull markets have negligible price impact in the short term.
Seasonals Say Sell
The seasonal chart below clearly indicates, especially in the case of corn, that odds of grain prices making highs during the “heat of harvest” bull news has a reasonably high degree of probability. With that, every corn and soybean producer should have their marketing tools ready to go around harvest time this year.
It's important to remember in every marketing program that the market itself dictates when we should be making marketing decisions — not when we want to. There are certain times of the year, depending on market conditions, which require constant attention to the markets, whereas other times of the year you can “take it easy.”
This happens to be one of those times where the market demands constant attention.
Having a good grasp of technical signals is of utmost importance, and being able to follow the market on a daily basis when you're in the midst of a supply-driven bull move should be a high priority for every producer. No one knows exactly where this market top will occur, but the technical signals will most likely be obvious at the time of the top.
Be prepared for a very unusual year in grain marketing.
Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.