Do you have corn or soybeans in storage? Join the crowd – it seems that everybody has grain in storage. And everybody is waiting for the same thing; a market rally that will reward patience with a better price.
I joined a crowd too. I am one of many experts who believe that corn and soybean prices will find a way to rally in the first half of 2016. I addressed it in my September column (Better Prices by Spring Revisited) and again in my December column (Late Lows). In each column I made the case for modestly higher cash prices by spring or early summer.
The new year has arrived and, here on the frozen tundra of the Northern Plains, our patience is being tested. Corn and wheat prices have slipped back below harvest levels. Soybean prices have returned to harvest levels. I’m nervous and it’s time to check the odds one more time.
For this analysis, I decided to focus on futures prices for corn and soybeans, rather than cash prices. I studied July futures prices for corn and soybeans from 1990 forward. In specific, I looked at January-March (JFM) and April-June (AMJ) futures price highs relative to the highs set during the previous October-December (OND) harvest period (see table).
The results for corn are not very encouraging. Since 1990, the highest price in the JFM period exceeded the highs set in OND in 15 of 26 years – that’s barely more than half the time. AMJ highs exceeded the OND highs in exactly half the years. The Jul’16 contract recorded a high price of $4.19½ /bu. in early October. This analysis indicates coin-toss odds of exceeding that number in the first-half of 2016. If you bin is full of corn, you like to have better odds than 50-50. Soybean results are a little better. Since 1990, the JFM or AMJ high prices exceeded OND highs in about 2 of 3 years. The OND high in July soybean futures was $9.31/bu., established on October 13.
How can this analysis differ so much from the analysis offered in my September and December columns? The answer is as simple as the difference between cash and futures prices.
Many producers assume that futures prices, like cash prices, tend to be lower at harvest. For corn and wheat in particular, this is not true. In fact, from 1990 to 2015, July corn futures prices traded lower from harvest to spring in 15 of 26 years.
If futures prices trend sideways or lower, how can I examine cash prices and conclude that prices should be modestly higher by spring? Because the futures price is just one part of the cash price. The other part is basis, and basis has a strong tendency to narrow from harvest to spring. Whenever you see the forecast for higher cash prices in spring and summer, remind yourself that the underlying driver is basis, not futures.
For the record, we started the new year with July corn and soybean futures at $3.64 and $8.68 per bushel, respectively. That’s more than 50¢ lower than the OND highs. Ouch. We need a big recovery to take out the OND highs. Sell rallies.