Without a doubt this is probably not a very popular headline. In my September article I outlined why the odds were very high that the corn and soybean market would peak in September. As I write this in mid-September, it appears that was the case. So let’s assume your neighbor paid no attention to that information and sold nothing and now he’s asking you what to do. Let’s think about what you might tell your neighbor.

To begin with, let me reiterate that this was a bull market that in the last two months has been driven by short supply (a poor harvest). Short crops peak just before, during or right after harvest. Should yields turn out to be less than expected (below 149 bu./acre for corn), there is an outside chance that the corn market could make another leg up into the month of November. Note I said chance—not a high probability. Everything in life has a “chance.” Marketing is a game of odds. The odds are not good this is going to occur.

As corn prices approach $7.50 and beans over $14, we learn that the laws of economics were not repealed. Keep the price of anything too high for too long and someone finds a way to grow more of it or to use less of it. In that light, we saw wheat substituted into corn rations by many livestock producers. Exports of both corn and soybeans started to drop off. China shifted much of its soybean purchases to South America. Argentina now has corn prices substantially below our levels, and we anticipate some exports transferring there and away from the U.S. As a producer, the worst thing that can happen is to keep the price of grain too high too long. It encourages overproduction and decreases usage. The best thing for all producers in the short term would be for prices to soften to a more normal but still profitable level.

 

How Low Can Prices Go?

 

Frankly, I don’t know and neither does anyone else. That is not the question to be asking. The questions are: what is the trend and is the price still profitable? If the trend is down (and it is) and the price is still profitable, then your neighbor should still be an aggressive seller.

Everything in life can be good or bad depending on the perspective of the viewer. On the way up producers looked back and compared the price of corn to the lowest of the last year which was likely $4 or lower. Bean prices were compared to $8.

Now on the way down, those comparisons change. Corn prices are compared to $7.50 and soybean prices are compared to $14, and thus as long as the market is lower than those two prices (they were each there for probably 10 minutes), your neighbor is going to assume that the market is too low and “cheap.” Try to encourage your neighbor not to fall into that trap. Price comparisons need to be based on a comparison to the expected average of the year, not to either the absolute top or the absolute bottom. As I write this, corn futures for this year are still trading above $7/bu. and soybeans over $13.50. As a betting man, I would certainly not bet heavily that the market will average either one of those prices for the next 12 months. With a sharp increase coming in planted corn acres – likely between 94.5 and 95 million acres – and the fact that we’ve had three years in a row of below trendline yields in corn, the odds of repeating another poor crop are small and with increased acres the odds of having a huge crop a year from now are quite high. Those are the odds I would want to go with. In which case, and let’s hope I’m wrong, corn in particular could be about to enter one of the biggest bear markets in history.

When prices are profitable and the trend is down, sell something and hope you are wrong. Think about it.