One of the most frustrating things for farmers who monitor grain prices through the spring of 2020 has been the apparent reluctance of values to move meaningfully. For an eight-week period through April and May, cash bids for both old crop and new crop corn in Ontario struggled to move even a dime per bushel, and that lull in volatility makes it really difficult for farmers to find an opportunity to market grain.
There has certainly been no shortage of production-related news throughout this past spring, including near-record seeding intentions, rapid planting progress, and increasing estimates of ending stocks. It’s a lot of information which is more than capable of moving prices. What’s been curiously absent during all of the financial market upheaval is big spec fund net positions in the futures market.
Prior to the coronavirus pandemic rattling the world economy, on March 10, the net position of the managed money in the corn pit at the Chicago Mercantile Exchange was 345,000 contracts. By the middle of May, that same net position was very close to 0. (A year ago in early June of 2019, the net position of the managed money in the Chicago corn futures market was roughly 450,000 contracts). It’s worth noting that the total number of corn contracts held by speculators has not changed dramatically, but the net position of longs, shorts, and spreads has shifted to becoming unusually well balanced.
Traders either trying to take positions in the futures market, or scrambling to get out of positions which they had already taken, are important because they make trades at a volume which can move price. We shouldn’t like to see a futures market price chart that’s gone to a flat line any more than we’d like to look over in a hospital at a heart monitor that’s barely moving. Last spring, the spec funds went into May with near-record short positions in corn, and then in mid and late May as it became clear that the wet weather was severely impeding planting progress, the futures market went on a sharp rally as the spec funds filled in their shorts. That rally ended at the exact same time as the managed money positions got even.
Volatility in the futures market is an important piece of achieving our price objectives. For Ontario grain growers, some excitement which pushes futures higher creates a pricing opportunity to sell when values are a little higher than normal supply and demand forces would put them, and for livestock producers, an oversized dip in prices can create an opportunity to book feed at better values. It takes awareness and discipline to fully take advantage of the situation, but futures volatility creates a landscape where good managers do better.
The spec funds do not make or break the market. Ultimately, the cash market demand for physical deliveries of grain establishes price. However, since the managed money brings an enormous volume of cash into the commodity futures, they effectively stretch the spring of market forces, and as you increase the tension on a spring, the faster and further the movement when an event triggers a move.
Price expectations for corn in 2020 are going to need to be pretty sober. Acreage intentions for corn planting this spring were already big before spring rolled around, and good weather enabled that crop to be planted into good field conditions early (both factors typically lead to higher yields at harvest). The possibility of a large 2020 corn crop combined with the sharp decline in ethanol demand for corn due to the COVID-19 induced economic shutdown suggest that corn will not be in short supply at any point in the near future, and growers will want to be clearly focused on taking advantage of any limited pricing rallies which present themselves.
Since mid-March, we’ve essentially participated in a market that has been afraid to take chances. It’s a bit like watching a baseball game where every batter lays down a bunt. The game will become a lot more exciting when at least a few of the players start swinging for the fences and bring some excitement back to the game.
The encouraging news is that we are seeing some return to normal in at least a few of the equity markets. On the NASDAQ exchange, a futures market primarily dominated by tech stocks, we’ve already seen indices bounce to pre-pandemic highs. The Dow-Jones Industrial and TSX indexes have also shown substantial recoveries in recent weeks. While it would be incorrect to believe that commodity prices should bounce to pre-shut-down levels, because the supply and demand fundamentals have changed, we should at least expect to see a resumption in volatility, and the opportunities which it can create.
Steve Kell operates a crop farm in Simcoe County and is a former grain merchant for Parrish and Heimbecker Ltd.
