Kub's Den

Grain prices aren't dreadful, in historical terms. Cash corn at $4.60 and soybeans at $12.25 are still better prices than farmers have had a chance to receive in seven of the past 10 harvest timeframes, and they're currently available even while the official supply-and-demand tables are predicting relative abundance.

However, grain prices are nevertheless disappointing when compared to last year's $6.90 (for corn) and $13.50 (for soybeans) at this time of year. The human brain has a tendency to anchor on its most recent or most extreme memories, and last year's prices tick both those boxes. With that context, it seems that no one is very excited about selling grain "across the scale" at harvest time in 2023. That's the colloquial phrase for selling bushels directly to the elevator at each day's spot price when it's delivered -- no planning ahead, no hedging months in advance, no storing for a few months to see what may happen in the future. Just bring in the grain today and take the price being offered today. Some farmers choose to market all their grain this way, but many farmers would typically set a price on their grain during other timeframes when the seasonal tendencies are better, and only sell across the scale if they happen to need cash at harvest, or if they raised more grain than they anticipated, or if the prices seem particularly compelling.

Grain trading companies and elevators are famously opaque when it comes to revealing information about how much grain they have, how much grain they're buying, how much they intend to sell, and so forth, to maintain their competitive advantages in the market. The data exists somewhere to definitively show whether or not farmers are selling fewer bushels than normal during this year's harvest season, i.e., the internal accounting programs at your preferred Mega Trading Company would show if farmer selling was running above or below some "normal" pace for this time of year. However, that data isn't publicly available. Eventually, USDA's Grain Stocks report will show a measurement of how much volume of grain is stored in on-farm bins and off-farm bins on Dec. 1 of this year, but that won't tell us anything about the ownership of those bushels. The grain could be sitting inside a commercial elevator, but still technically belong to a farmer and still technically be waiting to be "sold" and have a price set on that sale.

Therefore, if we want to know about farmer selling patterns during this harvest season, with a comprehensive nationwide approach, or with better accuracy than simply polling our friends and neighbors at the coffee shop, all we can really look at is the futures trading volume at the Chicago exchange. Any time a grain elevator buys 5,000 bushels of physical grain, they will hedge that transaction with an offsetting sale of a futures contract equivalent to 5,000 bushels. That's the mechanism that keeps these basis traders price-neutral in otherwise volatile markets. If there was a sudden crush of farmers selling physical bushels at countryside elevators during harvest, there would be a corresponding crush of hedge-setting futures sales from commercial grain trading companies.

Unfortunately for the purposes of this analysis, although commercial grain traders are by far the largest category of grain futures traders, they aren't alone in the market. Lots of buying and selling is also being done by "managed money" speculators from anywhere in the world. And even the "commercial" activity isn't limited to futures selling, which hedges physical buying. There are also hundreds of thousands of bushels of physical short sales (train loads, ocean vessel loads) being hedged with long futures. Looking at the raw volume of futures trading on any given day tells us nothing certain about what that volume represents. In other words, it's all very muddy.

In the first two weeks of October 2023, the average futures trading session at the CME exchange handled about 140,000 corn futures contracts each day. If each of those contracts represents 5,000 bushels of physical grain, that's equivalent to 700 million bushels traded each day. If the entire U.S. corn crop is going to be 15.1 billion bushels large, then each October day's futures session is trading the equivalent of 5% of the annual harvest.

Compare that to the similar average futures trading volumes during any given day in February, June or September, however, and you can see there is very little meaning to parse out of these numbers, when so many conflicting variables drive the trading volume. I wondered if, perhaps, the grain futures trading volume during the October 2023 harvest timeframe might be noticeably lower than during other recent harvest timeframes, but the data doesn't show much of a dramatic difference. In 2021, the average first-half October daily trading volume was 136,000 contracts; in 2013, it was as low as 113,000 contracts. In 2020, it was 189,000 contracts; in 2010, it was as high as 216,000 contracts.

So, there is some variation. Expressed as a percentage of the overall crop, each day's futures trade during the first half of October does seem to be slightly lower now (5%) than it used to be in, say, 2019, when each day's trade was equivalent to 7% of the total crop size. Some of that extra trading volume "could" have been extra commercial hedging activity because farmers were selling more grain "across the scales" in 2019 than they are today in 2023; but it could also have been a surge of speculator activity or a burst of export sales activity or just about anything.

It's certainly believable that farmers are relatively less willing to sell grain at harvest this year, especially with human behavior being what it is -- "recency bias" and anchoring to past prices. But for a confident measure of how much grain is still out there unpriced, or how much market power the farmers with unsold grain may collectively have, we really cannot say from futures trading volume data alone.

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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 involves substantial risk isn't suitable for everyone.

Elaine Kub, CFA is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at analysis@elainekub.com.

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