With such strong market fundamentals for Cornbelt crops, why are prices so low?  You are getting ready to sign a new cash rent lease for 2012 and current crop prices will make it difficult to pay the rent.  Will they get any better?

The challenges you face today to achieve profitability require more tranquilizers and stomach pills than you can find at a pharmacy.  But you must press on and do your best to feed your family.  But the markets keep nagging you and there does not seem to be any reason for corn and soybean prices to be so low, when demand is outpacing supply, and stocks are at pipeline levels.  Well, you are correct; there is no reason for corn and bean prices to be where they are, because of the absence of many Wall Street traders from the commodity market. They have been more focused on managing their risk from the European debt and deficit issues than what corn prices should be.

Iowa State University ag economist Steven Johnson assembles a good rationale for why market prices are where they are.  His latest newsletter details the influence of markets outside the farmer’s world of local elevator bids.  And to understand why the elevator manager won’t bid up any higher, you have to understand the impact of the outside markets.

1) Professional traders will watch the Continuous Commodity Index, which uses 17 major raw commodities to make one index value.  Currently it is on a bullish long term trend, but the price action had risen faster than the trend, and when prices returned to the trend line, it seemed the bottom had fallen out.  But the trend line supported it, and the CCI has returned to an upward trend.  Unfortunately, it is currently at the point of overhead resistance.  If it turns downward, that would be a negative.  However, if it can push through the resistance, it would be a significant show of force.

2) Other outside markets include gold and the European Debt Crisis.  Gold has been on an upward trend for several years, but exploded upward in July, retraced the last 400 points, and has taken off upward again.  The September price decline represented 15% of the value and came at the same time that the CCI was turning down and at the same time that corn prices were declining.  Johnson says, “The European debt situation was the underlying factor that fueled a great deal of the uncertainty that led to extreme price volatility in the commodity markets.”  He says when the Greek debt package was having problems in September the commodity markets moved lower to avert risk at higher levels.

3) The dollar value index is also an influence in commodity markets because of high export volumes of US commodities.  Its recent downturn versus other major currencies was bullish to the commodity market.  The index was on a steep uptrend in September when commodity markets were on a steep downtrend.  Because of the US balance of trade deficit and the need to sell products abroad, Johnson says the Federal Reserve keeps the dollar low in value to promote overseas sales.  That helps corn and pork, but hurts when you are buying fertilizer.  Johnson says in late October investors were shifting funds from commodity to currency markets which strengthens the dollars and puts downward pressure on grain and livestock futures.

4) Another driver is the impact of hedge funds, since pools of money move in and out of commodity markets if their managers sense an opportunity to make money for clients.  When certain managers taken action others will follow and the volume of contracts can balloon in short order without any outward reason.
As the end of the year draws near, many investors and fund managers will remove money from their accounts to show a profit on the books.  While that may be good for them, it has an impact on the commodity market that may not be good.  However, if the market drops, they will be back into their positions in early January to make another run in 2012.

Johnson warns that the European debt crisis remains a serious threat on the global economy.  It was the reason for the recent failure of the investment house of MF Global.  And he says the November 23 deadline for the Congressional Deficit Reduction Committee is also a date that could be critical to the outside markets that have such a major impact on the commodity markets.

Summary:
Commodity markets are influenced to a major extent by outside markets, such as international financial crises, the value of gold, the value of the dollar, and hedge funds.  With the European debt crisis, traders and money managers are trying to manage the risks faced by their client’s money and Cornbelt commodities are not a safe haven in their mind.  Subsequently, opportunities for higher corn and soybean prices have been few and far between.  The market may eventually sense that grains are priced at a bargain, but their priorities are elsewhere.

Source: FarmGate blog