Combine equal parts Chinese buying, South American crop problems and reduced U.S. crop prospects, then stand back and watch the bean market grind relentlessly to $15.
No, it’s not that easy. Soybean’s bullish fundamentals and bull market took time to develop. Not only did traders have a “prove-it” attitude toward China’s demand, South America’s production problems and lower U.S. planting intentions, the bean market first had to wrestle speculative money away from corn.
The “Corn Economy” didn’t give up control willingly. Many in the cash market still argue that corn is calling the shots in overall grain trends and claim the much stronger-than-normal post-harvest corn basis proves their case. These analysts have a long list of factors supporting corn basis: Expanded on-farm storage giving farmers greater ability to hold more of the crop off the market; stronger export demand than projected by the U.S. Department of Agriculture (USDA); stronger-than-projected U.S. feed and corn-for-ethanol use and (the market’s favorite) the corn was never there to begin with.
As is usually the case in the grain markets, no single factor is responsible for old-crop corn’s strong basis and futures’ stubborn ability to trade above $6. Since fall 2011, May 2012 corn futures (which represent 2011-crop supplies) closed under $6 just five times. Each time the May contract dipped below that level, end-users quickly extended coverage in the cash market and futures. That turned $6 into solid, long-term support for nearby delivery corn.
When May corn futures entered the delivery period, the first several days of the process saw the front-month contract climb to a big premium to not only new-crop futures, but the spot contract traded at more than a 30¢ premium to July futures. That’s a strong indication of tight supplies and strong demand. The market’s message to farmers: Deliver corn now!
That will tighten supplies of corn even further for the last quarter of the 2011-12 marketing year and likely result in chaotic market action.
Old-crop corn may have traded stubbornly above $6, but even that impressive price doesn’t compare to the new leader in the grain markets. Soybean futures rallied nearly $4 from a mid-December 2011 low to an April 2012 high just over $15. While soybeans marched higher, May corn and May Chicago wheat futures traded in an extremely choppy $1 range.
There’s really no need to ration old-crop (or new-crop) wheat use. Wheat is trading above normal levels, based on U.S. and global stocks-to-use ratios, only as a tag-along to soybean’s rally and corn’s ability to remain relatively high. Ever-tighter South American soybean supplies along with still-strong export demand for U.S. soybeans forced the bean market to grind higher in an attempt to “find the price” that slows global consumption. Corn futures took a different approach — trade high enough, long enough to eventually slow demand.