Are Large Corn and Soybean Price Swings Finished or Just Started

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Are Large Corn and Soybean Price Swings Finished or Just Started
Darrel Good, Agricultural Economist - University of Illinois

The recent, and dramatic swing upwards in the price of corn and soybeans has many caught off guard. Most had felt self-assured the looming prospects of another year of record crops would keep prices under pressure. Now those same folks are wondering if this move is the big one for the year. Todd Gleason has more from the University of Illinois on how one agricultural economist sees the marketplace for corn and soybeans.

There is a simple rule of thumb Darrel Good…
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There is a simple rule of thumb Darrel Good from the University of Illinois uses when thinking about each and every crop year. Start the marketing plan by plugging in a normal crop, then adjust as facts about the summer weather pattern become available.

Factually most weather forecasters have come a long way as it pertains to one long range item. There is a much agreement that a strong El Niño, which begins to fade in November or December, is a precursor to a warmer summer in the Midwest, and very dry conditions at some point in June, July or August. Although, that part isn’t abundantly clear. This is followed by a drought in South America. It’s just a forecast, but pretty solidly based on actuals. Solid enough that Darrel Good is willing to take a marketing stance not only for this year, but next.

Good :31 …to establish targets for pricing a portion of the 2016 and 2017 crops.

Quote Summary - We have previously made the case for an elevated risk of yields falling below trend value this year as summer weather is influenced by the fading El Niño episode. Even after the recent rally, new crop prices may still understate that risk. It will not be surprising to see periods of volatile prices, similar to that just experienced, continue through the summer. Now is the time for producers to establish targets for pricing a portion of the 2016 and 2017 crops.

Good means corn and soybeans. The price of both crops are experiencing a sharp rally this month. There are a number of contributing factors; excessive rainfall in parts of Argentina has likely resulted in a measurable, but unknown, reduction in the size of the soybean crop due to flooding; heat and dryness in Brazil has threatened the size of the corn crop in those areas that produced bumper crops the past two years; and a weaker U.S. dollar has raised expectations for increased export demand for U.S. corn and soybeans.

So where do prices go from here? In the short term, much will depend on how much corn and soybean production potential has been reduced in Brazil and Argentina says Good.

Good :12 …of U.S. export sales.

Quote Summary - The magnitude of the reduction will not be known for a while, but some evidence of the market’s expectation about South American crop size will likely be revealed in the pace of U.S. export sales.

Demand then, for the big crop from last year seems really strong, and when you couple this with production problems in South America, and the better than average chance of a production problem in the Corn Belt this summer, it points towards marketing opportunities. Meaning, Darrel Good is of a mind farmers should have price targets in place not only for this year’s corn and soybean crops, but also for next year’s crops. If those are reached, he thinks sales would be appropriate.