Analyst: Stay defensive

What happened

Last week’s rally in the corn and soybean markets gave way to a Friday sell-off which followed through early this week. A warmer, drier forecast flipped to a cooler and wetter outlook. Most of the Midwest will experience what may be termed ideal weather conditions. Prices wasted little time moving lower.

As weather premium seeps out of the market in late July and the forecast for early August looks conducive for crop growth and maturity, the price trend remains lower. As of this writing, a new contract low was established in soybeans, while corn futures are a few cents away from testing their contract low. Momentum is carrying the market lower.

Why this is important

Markets tend to move for various reasons. However, three reasons that might explain the current path for prices are perception, momentum, and attitude. The current perception in the corn and soybean markets is that favorable weather and big supplies (left over from last year) are keeping pressure on prices. In turn, end users are only buying as needed. The momentum for prices is down, and price charts are termed “weak.” The attitude is bearish, which leads to tepid buying interest from end users and speculators. Short (sold) positions by large managed money (speculators), as identified in the weekly Commodity Futures Trading Commission's Commitment of Traders report, remain near or at a record level.

It is important to recognize that a negative price environment is one where prices will often move lower than most expect, or move in a manner that makes sense fundamentally. For those producers who have short futures or long (bought) puts, consider staying the course, holding current positions. Neither the corn nor bean market has signaled that a low for the year is in place. While it may feel like a market is undervalued, downward price momentum can push prices much further than expected.

What can you do?

Stay alert for chart signals or a new fundamental event that may suggest a price low might be in place. Until then, consider holding short hedges or hold long puts, anticipating that downward price momentum and negative attitudes may continue to pressure prices. Long-term charts (several years of price activity) suggest more weakness could lie ahead.

If you are short futures, consider using buy-stop orders to manage risk. Buyers of corn and soybean products should consider remaining patient and buy only as needed. Also, watch for a chart signal or fundamental change to suggest that selling is exhausted. At that point, consider aggressively buying, as you may be able to secure inventory for less (or perhaps significantly less) than it costs to grow/produce.

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.