It’s becoming routine. Almost every crop report the USDA releases is a major shock to the industry with numbers almost always outside of the total estimate by the trade. In August, the USDA threw another curveball.
Some of the key points:
• They raised ending supplies of corn for this year from 880 million to 940 million bushels. On the bullish side, however, they lowered the carryover supply of corn for 2011-12 to 714 million bushels.
• In soybeans, they reduced this year’s acreage by 200,000 acres planted and 500,000 acres harvested. They also knocked the soybean yield by 2 bushels per acre, pegging it at 41.4 bushels per acre.
• Cotton yield forecast was increased from 800 to 822 pounds per acre and ending stocks were increased to 3.3 million bales.
The bottom line: Corn supplies are going to be tight for another year. Soybean supplies are tight in the United States but are increasing worldwide. Cotton supplies are increasing everywhere.
Impact on prices
Corn and soybeans are both in supply-driven bull markets. Supply-driven bull markets almost always peak just before, during or right after harvest. This one will be no different. A bullish report in August could well result in a blow off top before Midwestern farmers even get into full swing of harvest.
The other side of the coin is the reports clearly indicate that demand is being reduced at these high price levels. The world will not have a shortage of $14 soybeans or of $7.50 corn. For both of these commodities, the market may well be offering producers the highest prices of the next two years right now.
In cotton, all bull markets turn into bear markets and this one has already started. At over $1 per pound, consumers are switching from cotton to polyesters. Demand has been dramatically curtailed at these high price levels.
The good news — prices are still very profitable. At over 90 cents per pound for 2012 cotton, significant profits can still be locked in. Rallies in this market should be taken advantage of as a selling opportunity.
World is a volatile place
During the first two weeks of August, almost every market experienced more volatility and price swings than ever in history. The Dow Jones took a dive for more than 10 percent of value and crude oil dropped by over 14 percent. This was matched by similar volatilities in the livestock, grains and cotton.
In a world full of chaotic markets and with many European countries in worse financial shape than the U.S., the rapid flow of money from one asset class to another and even from one country to another will result in continued extreme volatility of all markets.
Keep your seat belts fastened in the months ahead.