Will we see a summer rally? That is probably the most often asked question we've been receiving at our farm marketing meetings. The question is especially poignant this year as we enter yet another growing season with pre-planting prices hovering around break-even levels at best, if not lower for many farmers.
The problem is that this year we see corn stocks at long-term norms with an expectation of higher spring plantings, while soybean carryout is epic large and the expected cut in acreage is not likely to put a severe dent in supplies.
So with that as a backdrop: What does the data tell us about marketing? Should we still hold out for a summer rally in June or July? Do big inventories change that strategy?
Let’s start first with the basic question: Are you better off in your marketing to wait for a June/July rally regardless of the backstory on stocks?
To answer that, we looked at the last 30 years of December corn and November soybean futures between Feb. 1 prior to planting and through the end of October at harvest. We have benchmarked the following charts to show “zero” as the price on Oct. 31, with the y-axis showing percent above or below that fall futures price. If you look at the 30-year average line in blue, you can see for corn that marketing in the spring of April/May has a higher price than June/July.
For example, marketing on May 1 has yielded a 10% higher price than fall (Oct. 31) vs. marketing on July 1, which has generated only an 8% improvement over the past 30 years.
For soybeans, the results are less obvious with the 30-year average line being flat between May and July. What is also apparent from the chart is that while the 30-year max territory (denoted as the upper shaded gray region) does peak in June/July for both corn and beans, the 80th percentile line does not. What that tells us is that sharp peaks in June/July are the exception (less than 20% of the time) and certainly not the rule.
Unfortunately for us, we are prone to cognitive bias, which leads us to remember those dramatic market moves even when they are not very likely in the historical record.
In other words, betting on a rally in June/July is generally not a sage bet.
But what happens when we enter a year with carry-in stocks above average? Does that change the historical tendency?
To answer that, we partitioned the 30 years of data into 15 years when old-crop stocks were above the median value over the 30-year period. The bottom pane of the charts above shows the results of that study. The implications are even more pronounced in big stocks years—selling early is a preferred long-term strategy.
Corn continues to see a tendency to nose-dive after the spring, but for soybeans, the drop is even more apparent. Soybeans no longer favor waiting for a weather rally in June/July as you lose about 2% in crop value if you wait between May and July.
Ultimately, market prices during the growing season are driven by expectations on supply. Whether that supply is in the form of stocks or in the form of new production. Certainly, it is no surprise that selling before harvest is a better option than pricing off the combine. But what may not be so obvious is the market seldom rewards waiting for the infamous “summer rally.” This effect is even more pronounced in years with big carry-in stocks like this year, suggesting that this season we will likely be doing more pricing, not less in the spring months.
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