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Avoid being locked into grain sales in late August
I have gone to my share of golf tournaments run by the Minnesota Corn Growers Association every August. At the 2016 tournament, three farmers asked me the same question: “How much lower do you think the corn market can go? I have a lot of corn on DP [delayed price agreement] that has to be priced out by the end of August.” I was a bit concerned to hear this from three separate farmers.
I felt sorry for the farmers and gave them an honest answer: The trend was down, and unless some major weather problem developed (like an early frost), corn prices would likely continue lower into harvest.
After the tournament, I called some grain elevators I worked with in the western, central, and eastern Corn Belt. Then I became really alarmed. All the elevators told me the same thing: they each had between 10 million and 80 million bushels of corn that farmers needed to price out, or the elevator would sell them out on August 31.
One elevator manager told me he wouldn’t allow anyone to roll it ahead for another year. He needed the room for farmers who were delivering new-crop corn and soybeans. The really sad part of the story is that many farmers did the same thing for three years in a row; the price of corn bottomed on the last day of August in 2016, 2017, and 2018.
The chart above shows the high in August in 2012 and 2013 and then the grinding bear market into the August 2016 low. You can see how often late August was a major low or within 10¢ of the harvest low. Even in 2021, when corn prices moved higher into April and May, prices still corrected down to a low in early September before turning higher into the spring of 2022.
A Seasonal Seller
For years, I have written that I am a seasonal seller of cash corn and soybeans. I get newcrop hedges in place in April through early June. I am also a seasonal buyer between August and October.
Today, when I look at the monthly corn and soybean chart going back through 2012, I can see that prices put in a high in the month of August in 2012 and 2013. That is why I call late August a key “change of trend” month. Most of the time it is a low, but not every year — some years it is a high.
The years we have peaked in August have been years when the crop is under stress in July and August. As the crop gets smaller week by week, prices move higher. The best indicator for changing yield and crop size is to watch the weekly USDA Crop Progress reports. If corn conditions are steady to higher in the month of July, then it tells us yields will be at (or better than) trend. If conditions move sharply lower in July, then yield potential is going lower, and odds are that prices will move higher. The key month to watch for soybeans is August.
In addition to U.S. crop ratings, it is important to watch global crop conditions and the early forecasts for acreage and production in Brazil and Argentina. My early thoughts are that soybean acres will be higher in both countries. Argentina is likely to increase corn acres as less winter wheat was planted in the summer of 2022.
On the charts, note that when prices rally sharply higher and put in a high in August, September corn goes to a large premium in the December contract. When prices put in an August high for soybeans, then September soybeans go to a large premium in the November contract. They want corn and soybeans now.
The opposite is also true. In years when prices bottom in August, then the September corn futures contract goes to a discount to the December corn contract and the September soybean contract goes to a discount to the November contract. That can create a spike bottom on the weekly continuation charts when the September contracts go off. It is another key signal to watch.
What Is Ahead for 2022?
In many ways, the market rally and the timing of the rally in 2022 have been similar to 2021. In 2021, corn and soybean prices peaked in April and May. Corn put in a low in early September, and the soybean market put in the harvest low in early November. The low price in August was within 10% of the harvest lows, but holding any crop into August was still a big mistake.
This year, we followed our marketing plan. We managed our risk so we could avoid some historical mistakes. The cash corn is all sold and more than 50% of the new crop is protected with hedges and puts. If we get a weather scare in August, I will make additional hedges or roll up the puts. If prices move lower into August, then I will be patient and wait for a November or December post harvest rally to make additional sales.
This chart shows the high in August in 2012 and 2013 and then the lower soybean market into August 2014. The final low came in August 2018. In most of the years, the August low was the low or very close to the harvest low. Holding onto soybeans into August has been a futures and basis mistake year after year. For livestock feeders, August through October has often been the best time to get meal needs locked in.
Note: The risk of loss in trading futures and/or options is substantial, and each investor and/or trader must consider whether this is a suitable investment. Past performance — whether actual or indicated by simulated historical tests of strategies — is not indicative of future results. Trading advice reflects goodfaith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice given will result in profitable trades.
Commodity Trader Al Kluis has been trading grain futures since 1974. Sign up for a free trial to his daily morning email and weekly “Kluis Report” by going to kluiscommodities.com.
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