By grain merchant Steve Kell
I don’t know how many people got to watch the bull riding at the Calgary Stampede in the first week of July, but anyone watching the commodity markets buck and twist between the June 30 and July 11 USDA reports got to see essentially the same show (minus the music and chuckwagons).
There were lots of ups and downs, a bit of mud got tossed around and a few farm boys got bruised. At the end of the two-week run, both the Chicago Mercantile Exchange and the Calgary Stampede Park returned to the way that they were before the activity began.
On June 30, the USDA reported that American farmers had planted 94.5 million acres of corn in 2016. It was about a
3 % increase over the March 31 estimate. It was also decidedly higher than many traders had anticipated, due to a wetter spring in much of the U.S. corn belt and higher soybean values, which had led people to expect less corn and more soybeans in 2016. The net impact of this news was a sharp drop in corn futures as speculators, who had built up substantial long positions in the corn futures, rushed to evacuate the market based on the news of a potentially bigger new crop supply. What occurred following the June 30 USDA Report, was real news amplified by funds money momentum.
On July 11, the USDA released its July 2016 Supply & Demand Summary. In this report, the USDA increased its estimate of the amount of corn being exported out of the country due to the production problems and reduced supply in South America, limiting Brazil and Argentina’s capacity to export corn. By dropping ending stocks to 1.7 billion bushels, corn futures rocketed upward just as quickly as they had fallen seven trading days earlier. Once again, it is a situation of real news being amplified by the volume of money in the futures market.
Fundamentally, the corn statistics which the USDA released in its last two reports are essentially correct. U.S. corn production is going to be bigger in 2016 than in earlier estimates. There is going to be about 14.54 billion bushels of corn grown in the United States this year, and it will be the biggest volume corn crop ever produced. That fact needs to be a cornerstone of whatever marketing plan you’re pulling together for this year’s crop.
In spite of Ontario’s growing conditions, this crop is a big one, and a downward shift in values shouldn’t surprise anyone. Corn futures went up $0.45 in June and then down $0.65 to their trough at the end of the first week of July.
The upswing in Chicago futures was at least partially the speculators trying to out-guess an acreage swing to soybeans, and it pushed the cash market to the point that elevator bids for new crop were over $5/bu in Ontario only a week before the reality of the acreage reminded the market that this is still the biggest corn crop in history.
The challenge for farmers is in staying clearly-enough focused on the hard truths of supply and demand to know when the markets have gone too far. By focusing on factors like stocks-to-use ratios, we should be able to know where the market should be, based on the fundamentals of supply and demand.
Knowing that a pendulum always swings through the middle, we can know to sell when the highs are too high, or buy when the lows are too low. Between June 25 and July 15, we had a good look at both high and low.
There is simply no sense in getting bogged down in a debate over whether or not speculators should be allowed to participate in the agricultural commodity markets.
The fact of the matter is that they bring a great deal of liquidity to the market and the volatility creates marketing opportunities that wouldn’t exist without them. Rather than worry about why there are speculators in the ag futures, let’s just focus on learning how to take their money and put it into our pockets.
If you ran a business near the Stampede Park in Calgary, you wouldn’t spend as much time worrying about why all of the tourists came to town as you would trying to figure out how to keep some of their money before they left.
Why should we treat fund money in the commodity exchange any differently?
Steve Kell operates a crop farm in Simcoe County and is a grain merchant for Parrish and Heimbecker Ltd. in Toronto.
