Managed money bets against farmers, expect price drop — big mistake

The basic premise of the summertime corn and soybean markets in North America is the belief that farmer storage of old crop inventory is exceptionally big, and that this year’s crop growing in the field is also very large.

There has been a widely held view across the marketplace that farmers will need to make a large volume of sales either to raise money or to make space to harvest this year’s crop, and in response futures prices have been very weak in anticipation of the anticipated wave of selling.

This view of the market was substantially re-enforced by the USDA’s June 28th Quarterly Grain Stocks Report which showed that there were nearly 5-billion bushels of corn and almost 1-billion bushels of soybeans in storage across the United States on June 1, 2024. At its core, what this report showed was a more than 20 % increase in grain stocks on June 1 2024 when compared to the same date in 2023. The USDA’s crop year ends on September 1 each year, (and in the southern U.S., corn harvest begins in August, so this is an appropriate cut-off date). About one-third of last year’s corn and soybeans were still in the bin with only a quarter of the year left before new crop harvest.

The managed money funds were already short futures even before the quarterly stocks report, but they took the report’s data like a green light for a sports car and accelerated their selling based on the belief that a wave of farmer selling lay ahead. In the three weeks following the quarterly stocks report corn futures dropped by 10 % and soybeans futures dropped 8 % as the funds built their way out to the record largest short positions ever held in Chicago corn and soybean futures.

This massive fall back in grain prices is based in large part on the premise that the farmer is going to need to sell old crop grain inventory regardless of price, and I believe that this notion is substantially flawed. The suggestion that farmers will simply be forced to sell grain substantially underestimated the intellectual capacity and risk management skill of the farmer. Just because there is grain in the bins does not mean that it is still for sale. This entire suggestion that there’s massive grain stocks in the country and that the farmer is going to have to barf it up regardless of price completely underestimates the farmer’s ability to make forward marketing decisions and the commercial grain trade’s capacity to map out logistics plans to keep inventory flowing.

If we could roll the clock back to June 1, there is no doubt in my mind that a full third of last year’s corn crop was still sitting in bins and silos across our marketplace. At the same time there was also a huge book of forward contracts where farmers and grain handlers had booked contracts to deliver June corn into the Hamilton export terminals and July sales into industrial processors like Ingredion or Greenfield.

We’ve had decades of experience where locking in the forward carry was the best way to earn a return from making forward sales, that it would be inept not to realize that farmers and grain traders will have a significant portion of the stored inventory covered by forward sales. There is a massive difference between the volume of grain that is out there and the portion of it that is still for sale. The interesting part of watching this summer’s corn and soybean markets unfold is watching the price sort out what it takes to grab those stocks which remain unsold.

The issue with the summertime corn and soybean markets is not the fault of the USDA’s report data. By all accounts, their estimates of grain stocks appear to be pretty accurate.

The debate exists around something which the USDA does not report on, which is how much of those stocks are already committed? Livestock farms for example, would never let themselves run out of feed. For example, if a dairy farm here in Ontario still had 32 % of its high moisture corn in the silo on the 1st of June, it would seem like that much inventory might be barely enough to get through to a new crop. That kind of corn will never be for sale. Never was for sale. But it still counts as inventory when we are looking at “stocks” reports.

We know that corn has been hard to acquire in the Ontario marketplace this summer because on the few occasions where we have seen a buyer caught short, the U.S. basis levels being offered to cover in those supply gaps has been far higher than we should ever see in the Great Lakes basin. If you are a basis trader, paying $0.35 over in U.S. funds for corn would be about as much fun as pulling a band-aid off your eyebrow.

The issue here is in inferring too much from the information contained in the USDA Quarterly Stocks Report. The agency only reported on the remaining inventory of grains and oilseeds stored on farms and in elevators. The managed money funds, (and perhaps a few commercial traders), perhaps read a bit too much into the report and built substantial short positions under the belief that the farmer had to sell.

It’s going to be a slow and slightly painful predicament for the parties that got in too deep to wiggle out of, but the really valuable lesson for the rest of us to learn is to not assume more than the cold hard data actually says.

And never underestimate or bet against a farmer.

Steve Kell is a Simcoe County crop farmer and handles grain merchandizing for Kell Grain, with elevators in Belleville and Gilford.