Grain prices are still searching for the bottom

If you've been browsing the Internet for cereal commentary this week, as I regularly do, the theme from all the writers is similar: Somewhere ahead of us is the bottom. We don't know when it will come, but we do know there's still a long way to go before we break even.

It has long been said that a sorrow shared is a sorrow halved. And there is plenty of that to expect this week, as an article about the frustration of an Illinois farmer shows.

She was frustrated by having to work so hard to finish such a toxic week in the soybean fields, and at the same time, she was discouraged by the price levels she was seeing. Her father encouraged her by telling her that this was part of the business and that the family and farmers in general had to persevere hard.

When I write about discouraging prices below the cost of production, I always think of 1 Corinthians 9:10, which says the farmer should “plow in hope.” And 2 Timothy 2:6 says, “The diligent farmer will be the first to receive a share of the harvest.”

I remember the plaque Squeeze gave me that said, “Pray for a good harvest, but keep hoeing!”

Unfortunately, I remember too many years where I lost hope after the crop budget predicted negative yields. My best hope was to see what was left after covering fixed costs and find that the first cut went to Farm Credit.

This year we are again struggling with 1 Timothy 5:18: “You shall not muzzle an ox while it is threshing out the grain.” This is an image of the ox not being allowed to eat the grain it is threshing, and it reminds me very much of the 1980s in my part of the world. The worst thing about these passages is that they remind us that, in principle, agriculture has not changed much in the last few thousand years.

There is little doubt that if it were easy to get into and out of grain production, many farmers would get out this year. If we look closely, we can see light in the axioms created this year, such as: “Happy is the rancher who buys his grain instead of growing it himself!”

corn

It should come as no surprise that speculative funds have increased their short positions in corn this week as we look for the bottom. According to the Commitment of Traders report, they sold 3,500 corn contracts. At the same time, however, they bought 5,000 soybean contracts. I don't know if this is evidence of bottom picking or just a reaction to a slight bullishness in the soybean markets on good export news.

Following the August 26 fund position report, soybeans rose 8 cents in the November futures contract. This was due to “technical buying,” a general term for some traders seeing something on the charts that was more than just stirred chicken entrails.

At the same time, according to some sources, there were “technical sales” in corn. On August 26, the market dropped the price of corn by five cents.

Drought levels

If, like me, you're looking for a fundamental reason to sell corn, you can point to the U.S. Department of Agriculture's astonishing estimate that we'll get a national average yield of 183.1 bpa this year. This is supported by the prediction of up to 0.75 inches of rain for the Midwest and the fact that only 7% of the corn crop is in drought-affected areas. Of course, the same article that gave me that stat also said that 21% of corn acreage was affected by dry weather, just not actual drought.

Put Ohio in the drought column. We're told that 59% of Ohio's crops are affected by the drought. Because of this, I got a call last week from a farmer in Somerset, Ohio, who mentioned that the corn there had suffered from the drought.

Overall, however, the eastern states have higher yield potential than the U.S. Department of Agriculture predicted, according to the Pro Farmer Crop Tour that concluded last week, where participants found that some acreage in the Corn Belt was worse than forecast, but eastern states were better.

Minnesota was notable in their opinion. They say the crop there is weak and looks bad, but the USDA says they will have as good a crop as last year. Pro Farmer estimates the state's crop at 181.1 bushels, less than the USDA, but not by much. Their yield would result in a production of just under 15 billion bushels. That yield would result in a carryover of under two billion bushels.

Pro Farmer estimates the soybean crop at 4.74 billion bushels, with a yield of 54.9 bpa. That would increase ending stocks by 140 million bushels. In this case, Pro Farmer's numbers were bearish on soybeans, but prices actually rose on August 26.

Trade

Chicago wheat closed last week at $4.98, below $5. That means we are trading all three major commodities below the nice round numbers we once thought were price floors. December corn futures were at $3.87 on August 26 and November soybeans were at $9.80 3/4.

It's a little scary that the most optimistic article I read this week was from a farmer who was happy to follow a disciplined marketing plan. Initially, when she paid for some fertilizer up front, she sold some grain at what she hoped was just a starting price. In the end, it was the only grain that sold for a decent profit.

The award for best article of the week should go to Bruce Knorr of Farm Progress. He went into detail about the differences in price trends between election years and all other years. Additionally, he provided graphical price trends showing when we can expect trend changes.

His thesis was that election years brought uncertainty around “tariffs, taxes and trade” due to political changes. His charts showed that corn futures tended to continue falling into December, but that the turnaround in election years tended to occur in October. For soybeans, the trend change appears to occur as early as October.

The same article talks about the October surprises we have seen on Wall Street in 1869, 1929, 1987 and 2008. This week we saw a new record for the Dow, well over 14,000.

In 1970, I was living with a small investor in India. If I remember one moment from Michelob correctly, he was having a hard time imagining the Dow Jones going to 3,000 points. Surely I could have found some reserves to invest in over the last 55 years along the way!