Price breakout coming for agricultural commodities?

If you have been watching agricultural commodity trade for the past two months, prices overall have been relatively quiet, compared to the volatility seen earlier in the summer.

But it is not just agricultural commodities that are trading in a holding pattern, the energy markets and some of the softs markets (sugar and cotton), have also been trading in a cautious manner. One thing history has taught me, is that the longer a market trades sideways, or in a consolidation pattern, the bigger the price breakout move will be in the near future.

Let’s take a closer look at why the markets are quiet now, and what could spur prices in the weeks ahead:

Traders are on the sidelines

No doubt about it, traders are mostly on the sidelines. After the dramatic whipsaw price action that many commodities saw during May and June, some traders seem to be content to take a breath, and “wait and see.” Higher initial margin requirements, limit up and limit down days, paying margin calls, and bigger price moves thanks to larger daily price limits wrecked the nerves of some of the most seasoned traders.

Further evidence of sideline action is apparent as daily market volume has dwindled and option volatility premium has vanished.

When looking at the grain markets, there is uncertainty regarding old crop ending stocks, and yield of the crop nearing harvest. The Sept. 30 U.S. Department of Agriculture Quarterly Stocks report shed light on old crop ending stocks. And as harvest begins, yield results have been mixed throughout the Midwest.

In the coming weeks, I have a sneaking suspicion that traders and the funds will come back into the marketplace in droves as commodity fundamentals will become a bit more “known” versus the floundering price and fundamental action as of late.

Traders are watching weather and the USDA

This likely speaks for itself. The next USDA report is already sneaking up on Oct. 12. There are plenty of questions as to exactly where the yield on this crop will end up. What will the USDA print on this report? Will they “punt” and leave yield unchanged until the November report?

Regarding soybeans, if yield is estimated to be less than 50 bushels per acre (currently 50.6 on the September USDA report), that would be a reason to justify January 2022 soybean futures trading through $14 a bushel resistance, with an upward potential price target of $16 a bushel futures. However, if yield is increased, that might weigh on prices.

When looking at corn, the USDA is currently using a potential national yield of 176.3 bushels per acre. The previous record was 176.6 bushels per acre back in 2017. The line in the sand for corn is 175 bushels per acre. If yield is perceived to be less than that, then that would justify price action for the December 2021 futures contract to trade above $6 a bushel.

The global marketplace is watching the value of the U.S. dollar

Besides yield, we need to also monitor demand. One very important demand category for agriculture is the export markets. That means the value of the dollar also needs to be monitored.

Remember, the bottom line about the value of the U.S. dollar, is that when the value of the dollar is lower, it makes it more attractive for other countries to import our commodities due to currency exchange rates. The U.S dollar index, like many commodities, has also been trading in a quiet manner waiting to see how the U.S. and world economies come out of the COVID-19 uncertainties that still persist globally.

Over the past few weeks the value of the dollar has been trading in a sideways fashion. Will the value drop low enough in coming weeks to entice grain export sales to increase? Or will the dollar begin to work higher, and curb potential export demand. The answer may be here by month end.

October is set to be an exciting month for trade. A progressing harvest, getting the Gulf export terminals back up and running after Hurricane Ida, a USDA WASDE report, and global economic recovery. You’ll be busy with harvest, but do not lose sight on the agricultural markets. There is a big market move likely coming.

Editor’s note: Naomi Blohm is a marketing advisor with Total Farm Marketing by Stewart-Marketing and she is a regular contributor to the Iowa PBS series “Market to Market.” She can be reached at [email protected].