In my opinion this growing season should be broken up into two parts. The first would be before mid-July. The second part is everything after. I would argue that the first part will be heavily influenced by traditional factors such as weather and growing conditions. The second part should focus more on the global political and economic situation, plus a heavy influence of potential supply and demand factors. This concept gives us two distinct pricing opportunities.
The first zone:
This zone is based primarily off weather and crop conditions, meaning that the market will base its valuation from old crop knowns and new crop potential. This potential is what is going to give us volatility and market direction, it shouldn’t give us a new pricing plateau. Meaning that the prices won’t come crashing down but are more likely to rally if weather is poor. Basically, the world needs a bumper crop for a price correction. In my opinion I’m neutral to bullish on commodities for the next 60 days.
The Second zone:
This is a lot trickier because in this zone I believe the geopolitical and economic situation will raise its ugly head and affect the commodity markets. This means that the potential for a repeat of 2008 is very real and should be taken seriously.
Why This Matters
There are really two parts to this equation: A production risk side and economic risk side. As a farmer it would be very risky to contract grain when production risk is high. Therefore, it is prudent to just stand aside and let the market do its thing – especially since the deck is stacked for a bullish scenario.
The second part is economic risk from outside sources. This is what happened in 2008 and the market never recovered for many years. This second half is when you need to evaluate profitability and remove some of the geopolitical risk from your farm. Under normal circumstances the geopolitical risk is low and typically farmers never need to worry about it. Those days are gone.
I know a lot of you are stressed out regarding grain marketing because there is so much at stake.
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Top chart is Canola Crush Margins ($/mt) and bottom is Soybeans ($/bu). Note that Soybean margins are significantly better than in jan 2020. Canola is only at $3.86/mt and in 2020 is was over 100. Ie. More money in crushing soy.