There are times when supply and demand factors appear aligned, suggesting prices should increase in value. This past fall, new crop December 2023 corn prices were trading near $6.35. Old crop March corn futures were trading near $7, creating an inverse in price. An inverse occurs when the market is willing to pay more for supply on hand than expected supply in the future. Tight world supplies might suggest it would be just a matter of time before new crop prices would rally. Yet, that has not been the case, as new crop is now trading near $5.75.
Actions speak louder than words. This quote may reflect what has happened in the corn market.
There were, by many accounts, reasons for corn prices to rally after harvest, a time when supply availability is at a peak. After farmers shut the doors of their storage bins, it usually requires a price rally to encourage selling.
Argentina, one of the world’s leading corn exporters, turned dry and struggles with drought; the war in Ukraine continues; and harvested acres for the 2022 crop were reduced. Yet, when futures markets digested the news, small price increases were noted. Follow-through buying didn’t occur, with prices losing ground.
One reason is that a market needs buyers who are willing to buy at higher prices, believing even higher prices are in store. In other words, though the sentiment may be supportive for higher prices, the action isn’t.
This suggests a couple of things relevant to corn prices so far in 2023. Corn prices, from a historical perspective, are high. When prices begin to trade higher, traders are looking for momentum that encourages them to buy. If momentum is slowing as prices rally, they may either stay on the sidelines or read that as a signal to be a seller. Another reason for lack of rally is that farmers know prices are high historically and that high prices can quickly disappear. Therefore, between strong basis incentives and small futures rallies, they have likely been selling cash corn at a quicker pace than in most years. If commercial firms who buy their corn don’t have an immediate market, they are likely selling futures to hedge, which keeps pressure on prices. Another component to the lack of buying is when those who buy corn for feed, whether domestic or foreign, buy copious supplies when prices are low and only as-needed when prices are high, hoping future prices will decline. This is called just-in-time inventory buying.
The futures exchanges are where prices are determined. You might think of the exchanges as a centralized auction place where all buyers and sellers come together. The futures price is the cumulative vote by all participants. If traders and buyers are not willing to buy when fundamentals suggest higher prices, the dynamic of the market can change. A more visual example could be a room filled with 10 people who all agree the price picture looks supportive. Yet, none of the ten are buying. They are waiting for others to buy first. Eventually, someone sells. Doubt creeps in. Currently, doubt has crept into the futures market.
Whether there’s doubt or hope, the markets will move. Talk to a professional about ways to prepare for any market move. Be sure to learn the risks and rewards of your strategy before entering into any positions.