Why 2019’s Crop Burned the ‘Prove It’ Market

USFR 11/23/19 RT 2
2019 proved no matter what obstacles Mother Nature throws at farmers, a bountiful crop is possible. Analysts say that could make it even more difficult for the market to produce a weather rally in the future. ( Darrell Smith )

An extremely wet spring. A record amount of prevent plant. Farmers mudding in their crop well into summer. These are all signs that signaled to the market a large crop of corn just wasn’t there this year. Farmers, however, proved that market wrong.

“This is a ‘prove it market,’ and if we have another wet spring, which climatologists are starting to say we could, it's going to be a lot harder to get that same type of excitement into markets,” says Arlan Suderman of INTL FCStone.

Suderman says 2019 was another reminder that larger players are the ones driving the commodity markets, not farmers.

“It used to be the biggest player in the market was the farmer,” says Suderman. “Now the biggest player is easily the speculative funds.”

Suderman says charts and trading momentum typically drive actions of the funds.

“On May 24, 2018, the funds started shorting the commodity markets, especially the ag, and they've made a lot of money since then shorting the ag markets,” he says. “We've rallied through the fall, basically by unwinding those short positions. They really didn't want to go long, but they unwound a lot of short positions, just in case we get a trade deal. Now that momentum is starting to wane, because they're tiring of getting a trade deal, and they're starting to default back to the short side again.”

Suderman says if a trade deal does come through by the end of the year, the funds may be willing to go long again. But if not, the market could react in a negative way.

“If we don’t get a trade deal, there's a lot of power there for them to ride this to the short side again,” says Suderman.

If a Phase 1 trade deal with China doesn’t come through, and Congress doesn’t focus on ratifying USCMA before 2020, Matt Bennett of AgMarket.Net says it sets a negative tone heading into the new year, instead of providing support to prices.

“I felt like, all along, if you get a 20- to 30-cent rally, maybe you could get a dime push out of your December 20 contract,” says Bennett. “Bottom-line, though, in a situation with no trade deals, I think that you're looking at a really tough setup, because you’ll have a lot of prevent plant acres coming back into the mix, acreage is liable to be very robust—it could be 95 million, or it could be above. I don't think it's going to be much above, because fiscally, we've got to be able to afford to put the corn crop in the field.”

In that situation, Bennett fears crop carryout could grow in a range that’s not price-friendly for corn.

Suderman says he’s not as bearish when it comes to possibly a carryout situation, but he’s definitely not bullish.

“I do see global demand still exceeding production. And so that sees exports increase next year to absorb some of it, but that's still not a friendly outlook—that still suggests lower cash prices,” says Suderman. “If you put it in based on history, I'd suggest marking your cash average prices maybe 50 cents lower than this past year.”

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