Commodity Insight: Downside targets achieved; now it is weather

In mid-February, my weekly column was entitled “Grain prices living on borrowed time.” Because a wide array of markets collapsed this week, including the grain complex, I wish to repost portions of that column and show clearly why I was so bearish about new crop grains three long months ago.

“In the absence of weather-related problems this growing season in the United States, grain prices are now at levels that are simply unsustainable.

“Grain prices have rallied sharply since September 2020, with the line of least resistance lower rather than higher. …

“My immediate concern is about elevated values for grains, not livestock prices that could have more room to run on the upside. U.S. livestock values are not overvalued similar to the grains.

“A big drag on all markets — grains, livestock, all other commodity markets, as well as stocks and bonds — is the Federal Reserve lifting U.S. interest at the fastest pace in 40 years in a battle to fight inflation.

“The Fed has stated several times the past few weeks that interest rates will remain elevated for all of 2023 with further rate hikes promised. The Fed hikes rates to slow economic growth and place downward pressure on all markets and prices. …

“There is no doubt inflation in the United States and across the globe is on the wane and deflation is gaining momentum. Moving forward, the markets most likely to face further downward pressure are grains.

“With record-setting crops coming from Brazil and U.S. farmers poised to plant ‘fence row to fence row,’ the world will soon be enjoying ample to burdensome supplies of grains. My downside target for corn is $5 a bushel and for soybeans it is $12 a bushel.

“Fundamentally, U.S. grain prices appear to be living on borrowed time. By any measure, prices are quite elevated from where they were as recently as September 2020.

“Plus, history shows that grain prices seldom remain elevated and locked in a bull market for more than two to two and a half years.

“As of now, the grain complex and prices have been grinding higher for more than two years, which again suggests the complex is living on borrowed time.

“Also keep in mind the historic drought that plagued South America in 2021-2022 is unlikely to be repeated anytime soon. In fact, with Brazil expected to harvest a bin-busting record grain crop this year, history shows next year could be the same.

“In my wildest dreams I cannot envision a scenario where U.S. grain prices that are now historically high priced having rallied sharply the past two years can do anything other than head lower in the months ahead.

“In summary: the current grain market is long in the tooth. Inflation is easing and disinflation is on the rise.

“The Fed is expected to hike rates further moving forward. Slow growth is starting to show up in countries that buy U.S. grain and American exports are weakening.

“Grain producers should be willing hedgers. Grain traders should avoid the long side of the ledger.

“Grain prices in the United States are now at levels that are simply unsustainable.”

Everything above was penned and posted in this newspaper three months ago. This week, as fears of a recession became more possible, a default on the debt ceiling touted daily and a sharp decline in consumer confidence, most all markets were slammed lower and the grains followed suit.

And the low for new crop soybeans this week is $11.84 and for new crop corn prices it is $4.94 a bushel. My downside targets that I projected three months ago were achieved this week.

Regarding the grain complex going into the heart of the growing season, and to repeat what I stated last week, moving forward, the key for grain prices is the weather conditions this growing season.

My rule of thumb is simple: If the weather in the U.S. Grain Belt appears threatening on June 15, the odds are high the grain market will rise with a fury.

And June 15 is still in front of us with the looming El Niño worrisome and likely to be a market-mover somewhere on the globe. It is now all about the weather, the weather, the weather.

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