The grain complex has been extremely volatile over the last 4-6 months, with soybeans rallying over $4.50 and corn $1.60. The majority of this rally has been from fears of dryness in South America and how much damage the dry spell has done to corn and soybeans. This catalyst was just the start, though. We then started to price in the expectation of the USDA lowering ending stocks, which they failed to do on the last report, as well as China’s demand (or lack of cancellations, at least), and finally the fears of inflation for commodities thanks to a weak USD.
There’s really been a perfect storm of bullish catalysts to support this move higher, but as we all know, nothing goes higher forever. This has us trying to decide where the grains are fairly priced for our current situation. Some questions come to mind: Is the South American crop completely ruined? Will China still come in and cancel purchases? Is the USDA going to continue to act as if we have more grain than we do?
One bullish catalyst I don’t see going away is inflation. I expect the Biden-Harris administration to continue to print money to support the American people without concerns of the economic outcomes, which should continue to result in a devalued USD and higher commodity prices. That being said, I can see the other bullish factors fading, or at least not being as severe as once feared. “Bad news” tends to get priced in far earlier than it comes to fruition. In other words, we may overestimate how bad things actually are, just to be safe— when the dust settles, the market may realize it over-priced the negative news from South America or how much Chinese demand there was, for example.
In the end, I think we’re closer to a top than a bottom, but by no means does that mean a move to $14+ isn’t possible, because it is. Volatility like this provides great opportunities to use option trading, so always keep that route in mind.
March Soybean Chart:
March Corn Chart:
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