Finding More Respect for Commodity Price Trends
After seeing Wednesday night's televised news bulletin reporting Russia had launched a full-scale attack on Ukraine and after waking up early Thursday to limit-up grain prices, I couldn't help but be struck by the contrast in tone coming from USDA's Ag Outlook Forum on Thursday morning.
The annual event was being held virtually and, unlike previous years, all of USDA's new-crop estimates were released promptly at 6 a.m. CST Thursday.
The Grains and Oilseeds Outlook showed USDA starting with planting estimates of 92 million acres of corn and 88 million acres of soybeans, and I had to wonder if this year's higher fertilizer and energy costs were considered. USDA updated its cost of production estimates for 2022 in December and at that time, the big increases in this year's input costs were ignored.
I won't go over all the details as few will survive the changes in markets we've already seen, but the average farm price estimates looked especially out of place early Thursday. USDA's outlook showed $5.00 for corn while Thursday morning quotes showed December corn trading above $6.35. USDA's average farm price for soybeans was $12.75 while November soybeans were trading above $15.00. Granted, the morning's bids were hopped up on the excitement of Russia attacking Ukraine, but those are some big divergences right out of the gate in 2022.
The stark contrast in prices also reminded me the points I brought up earlier this month in the Todd's Take, "Commodity Market Fundamentals Stumble ..." at https://www.dtnpf.com/….
Once again, here was another example of fundamental estimates that weren't matching the markets of the moment. It was difficult to see what value Thursday's USDA estimates offered to producers.
This is not a personal attack on anyone and I respect much of the work USDA does, like Grain Stocks reports. When it comes to markets, I am a practical person and Grain Stocks reports are a practical form of information that help keep us all in touch with actual supplies. For producers trying to market their grain, monthly grain stocks reports would be more helpful than early season outlooks based on educated stabs in the dark.
Of course, Grain Stocks reports alone aren't enough. Stocks totals give us a good assessment of where supplies stand, but they don't tell us anything about where prices are headed. That is a much tougher task.
DTN's Six Market Factors certainly play an important part, helping focus our attention of on what the market says about itself. Over the past two years, the star factor has been Trend. Since late 2020, when corn and soybean prices started to pull out of the depths of the pandemic, the price trends became the best market advisers anyone could ask for. The success of those who followed the trend the past two years is a strong reminder of how valuable that information can be.
The other lesson of the past two years has to do with a better understanding of the forces that move prices. While I say that we can't just focus on past information, knowing how to look forward is not a comfortable process.
For example, consider how we started hearing about dry weather in the southern tip of Brazil in early December. Other than recognizing influence from La Nina, there wasn't much evidence to suggest serious drought damage at first, but the problem persisted and become a much bigger influence for higher corn and soybean prices by January.
Russia's threat to Ukraine is another price influence that started small and was easy to overlook early. Russian troops had been an on-and-off threat since 2014. President Putin could have been bluffing. It is the uncertainty that holds us back from acting on these two-sided coins, even as prices were trending higher.
The reason I'm drawn to this topic is that, while I recognize the need to be more forward-looking, I've also noticed when we try to look forward, we are often paralyzed by uncertainty. Even so, the main drivers of market prices are our fears about what might happen in the future. Those fears may turn out to be justified or not, but as long as they are active they exert influence on prices.
Here early Friday (Feb. 25), soybean prices have pulled back sharply from Thursday's high of $17.65 and it looks like the initial buying panic stemming from news of the Russian attack has eased, at least for now. But the main concerns of the market and the price trend continue to lean bullish for soybeans. Drought-damaged production in South America, a disruption of Ukraine's ability to export sunflower oil, rising crude oil prices and a long-term expansion of renewable diesel plant capacity all continue to outweigh whatever bearish concerns there might be for soybeans at the moment.
It sounds unscientific to say, but it is the way we feel about all these changing conditions that will guide the future course of soybean prices. Currently, it is difficult to know just how much Russia's invasion of Ukraine will actually disrupt the flow of grain in the world, but as long as those fears are active, they will exert influence on prices.
The difficult thing to wrap our heads around is that today's obvious price influences, like drought in South America and the attack on Ukraine, emerged from uncertainty the way we all did, as unproven blobs of possibility.
If we are going to successfully navigate prices in 2022, I'm convinced we will need to have more respect for the price trends of the market, even when they don't start with the strongest fundamental evidence.
Speaking of price trends, stay tuned to DTN late Monday for an explanation of what February's new-crop prices will mean for crop insurance alternatives in 2022.
Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.
Todd Hultman can be reached at Todd.Hultman@dtn.com
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