Fundamental changes have entered the market

The U.S. Department of Agriculture rattled the markets Sept. 30 with a grain stocks report that showed less corn on hand Sept. 1 than anyone thought and showed more soybeans than expected. 

Corn prices reacted by gaining eight cents and soybeans reacted by losing 46 cents on nearby futures contracts. 

This typical, one-day wonder of a report reaction was fairly sharp because both corn and soybean USDA balance sheets show the commodities to be what we call “tight” in supply. That is, we are seeing prices in a historically high range because we are anticipating another year of being close to pipeline supplies at the end of summer. 

Corn surprises

The USDA grain stocks for corn was reported at 1.377 billion bushels. This is the amount left over at the end of the marketing year, Aug. 31. It represents the “carry in” for the new marketing year, with a month to go before we have enough harvest to get supplies comfortable because of harvest. 

The number came as a surprise because it was lower than any trade guess. The average guess was 1.512 billion bushels, supported by the recent WASDE report of 1.525. There must have been some interesting arguments at USDA to change it that much between reports. 

For perspective, last year at the same time, we had 1.235 billion bushels in stocks. So, the stocks have grown a little, but from a critically low level. 

Something just over a billion bushels is considered minimum pipeline supply; some say 1.2 billion. This “carry out” number is what drives our markets all year. It now becomes the carry in for the new year. 

Soybeans

At the same time, the stocks report was bearish for soybean prices. It showed 274 million bushels in storage, but the highest trade guess was 264 million. The average guess was 240 million, the number reported in the WASDE report recently. Any of these numbers are close to a pipeline supply, but the report eased the tightness of stocks a little, even as harvest is well underway for soybeans. 

Curiously, the USDA arrived at the new numbers by changing some numbers from last year. USDA reports in January the “final” number for crop production for corn and for soybeans, but all of a sudden it is not final anymore. 

In this report, they revised 2021/2022 production by dropping 41 million bushels, to 15.091 billion bushels. They did it by revising the bpa to 176.7, down 0.3 bpa. I have no idea what the reasoning was behind this, unless the grains stocks were something that could be measured, and this was a way of juggling the numbers to make it come out right. 

This is not a big change, but it came at a critical time and changed the balance sheet for what the coming ending stocks might be. 

Similarly, USDA increased last year’s soybean yield by 0.3 bpa to 51.7 bpa. This then showed production at 4.465 billion bushels, up 30.2 million. 

In my business, there is a reason for everything. Prices change on the Chicago Board of Trade, and there are reasons for the changes. Sometimes the reasons are obvious, like in the recent stocks report. Sometimes they are subtle. Sometimes we anticipate the changes and are right. Sometimes we are wrong. 

But, every time the prices change, we in the analyst positions find reasons for them, even if we have to make them up. Yes, I said that out loud. 

Cause of change

Price changes come as a result of fundamental information or technical analysis. Both are going on all the time, but sometimes one dominates over the other. 

Fundamental changes are those things which are known or guessed at involving actual supply and demand issues. For example, what is the size of our crop? What is the demand, for feeding, for ethanol, for soy diesel and plant-derived jet A? Do we have shipping or weather impacts currently? 

Technical changes are purely a matter of studying charts of historical data for buy and sell signals. This is an intricate system of analysis involving different types of charts, but with known rules for how prices tend to change given certain chart signals. 

A current example is in soybean charts. The price history is getting squeezed into what is called a pennant formation. That is, the trend lines for high and low prices recently are showing an increasingly smaller range. 

The chart of those lines shows that recently we have been forced out of the “pennant.” The rule is that, whatever direction the market breaks out of the pennant, will establish a new trend. Except for last week, it broke out to the cheaper side, but couldn’t hold it. The rule was broken. 

Against this backdrop of fundamental and technical reasoning comes some problems that may impact things shortly. The water levels on our major rivers are so low that we are underleading barges. That raises freight rates. 

Some barges that are already full are stuck, unable to navigate. That lessens the supply of barges at a time when we need more of them because of underleading. 

Then, we have the rail strike looming just when we may be more dependent upon it because of river problems. The strike was settled but has not been ratified and may not be.