Analyst: Oversold, but is it time to buy?

What happened

Corn, soybeans, and wheat prices have trended down for the better part of two years. There have been some upward price corrections along the way; however, these have failed. The second half of June and most of July saw downward pressure, with new contract lows established for all three commodities.

Technical indicators (price charts) suggest the markets are oversold. However, that doesn’t necessarily indicate prices must recover. When technical indicators indicate “oversold” for more than a few weeks, the interpretation can be that prices are trending lower and demand is weak, supplies are increasing, or both.

The recent plunge in prices has been steep. The good news for buyers is an unexpected opportunity to lock in less expensive supply for immediate and long-term needs has developed.

Why this is important

When ample supplies are available, prices can remain weak for extended periods. And when prices are low, demand has a tendency to increase. Increased demand may cause prices to go higher. Think of the old saying, “Low prices cure low prices.”

However, increasing demand usually takes time. For corn demand to increase, end users, such as producers of cattle, dairy, or hogs, must expand their operations. This can take many months or even years. Ultimately demand increases, and the need for more supply is recognized.

When commodities trade at or below their cost of production, they are considered a bargain. For the foreseeable future, end users are likely to remain on a buy-as-needed basis due to plentiful supplies. That is, unless something comes along to suggest otherwise.

Considering it is just past mid-July, weather is still critical for crop production in the Northern Hemisphere. Any hint of less-than-ideal growing conditions could change the buying mindset quickly. With the price of corn, wheat, and soybeans at multiyear-low levels, it wouldn’t take much change in the production outlook to see more aggressive buying by end users.

A change in the production outlook could also spark buying from speculators. Speculative interest looks for undervalued markets, as well as technical buy signals. Both could add upward momentum for prices in the form of new buying and short covering (buying back sold contracts).

What can you do?

If you are considering covering feed needs or retaining paper ownership of sold grains, the first thing you can do is monitor the market. After a major turn lower, buy opportunities are potentially at hand. Be open to the idea that price trends can and do change, sometimes quickly. A known fundamental may be referred to as a useless fundamental because it is considered old news and already factored into the current price.

Consult with your adviser and look for technical signals or new fundamental news that could suggest prices are losing downward momentum or providing buy signals. Expect to consider purchasing call options, futures, or actual cash supply. High output by producers cannot be sustained indefinitely unless futures prices, at some point, recover from levels below the cost of production.

Find what works for you

Work with a professional to find the strategy or strategies that are best suited for your operation. Communication is important. Ask critical questions and garner a full comprehension of consequences and potential rewards before executing. The idea is to make good decisions for the operation and less emotionally charged responses to market moves, which are always dynamic.

Editor's Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.

Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy, or discipline will guarantee success or profits. Any decisions you may make to buy, sell, or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of the National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.

About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.