By Karl Setzer

Market Analysis 

 

Historically, there has been a term used in the futures market to describe commodity buying in uncertain economic times, called “flight to quality.”

What this term means is in past years when the financial markets became unsteady, investors would come to the commodity market to keep their monies until volatility eased. Many of these investors also wanted to own a physical product that would hold more value than a financial position in case of a total market collapse.

In recent years this buying pattern has changed and, in many ways, come to an end. This is because many investors now hold commodities as part of their entire basket of possible money placements.

As a result, some commodities, such as oilseeds and grains, tend to move with the financial market instead of against it. This can also make commodities move against traditional thinking when it comes to fundamental influences.

A question getting more attention in the market is how much old-crop inventory will be moved prior to harvest this year, especially from the farm? Farmers across the Corn Belt continue to hold a large amount of inventory, especially in the Western Belt. Buyers believe this inventory has to move prior to harvest, but that is not necessarily the case.

In fact, more farmers across the Western Belt claim with their increased storage capacity, they will be able to hold all of their remaining old-crop bushels in addition to their new crop. There is a concern with this stored inventory though, and that is quality. Stored inventory has again taken on moisture in bins this year, especially corn. With recent higher temperatures and less than perfect conditions to run aeration systems, there are legitimate concerns that some of this inventory has suffered quality loss.

It is not out of the question that some producers are waiting for new-crop inventory to blend with their old crop before making deliveries.

There is a misconception in the market that having crop revenue insurance is just as good as risk management. Having revenue insurance provides some support, but not nearly as much as a true risk management program tailored to meet your specific needs.

The primary reason for this difference is insurance programs have many variables attached to them, and only pay a percentage of market values, potentially leaving a large amount of revenue on the table.

Forecasters believe the current El Nino weather system will continue to strengthen for the remainder of the year. In fact, some models indicate El Nino will build to one of the strongest the United States has seen by the end of the year. That will make this El Nino the longest-running in the past 66 years.

The question now is if these conditions, which are usually favorable for crop development, will help offset some of the losses from earlier in the growing season.

The most attention on yield potential right now is on soybeans. This is from the fact that we could see new-crop soybean reserves drop to a rationing level with the slightest reduction to yields.

Some models indicate a national yield of just 43 bushels per acre would cause this situation, given current soybean demand. These theories are counting on a smaller old-crop carryout, though – and so far that is a great unknown.

The latest cattle on feed report gave more support to a feed grain market that has been struggling lately. While the on-feed number was 102 percent of a year ago and placements totaled 101 percent, the volume of cattle entering lots was still down 7 percent from the five-year average.

As suspected, this is from heifers being kept back to build the U.S. breeding herd. The number of heifers kept for this purpose increased 7 percent from last year, the largest retention number since 2006.

Karl Setzer is a commodity trading advisor/market analyst at Maxyield Cooperative. His commentary and market analysis is available daily on radio, in newsprint and on the Internet at www.maxyieldcooperative.com

The opinions and views in this commentary are solely those of Karl Setzer. Data used for this commentary obtained from various sources are believed to be accurate.