The mild winter has finally given way to the official start of the U.S. planting season. With the 2024 growing season now underway, there are several market factors worth watching. Weather automatically comes to the forefront of the trade’s focus but this year’s overall market theme has been the “bigger picture.” At this critical juncture for grain markets, the relationship between these two forces will undoubtedly lead price direction.
As I have touched on in previous weeks, money flow remains a top influence across the broad market. Over the past couple of weeks, the funds have remained heavy short grain markets. Why? It's early in the growing season and so far, so good. Recent rains have largely taken drought concerns off the table. Just remember, the funds bet with the trend but that doesn’t mean it is fool proof. The cotton market is a perfect example of the funds being “long and wrong.”
Cotton hit a 20-month high in February as tight domestic supplies, improving demand and drought risk bought acres for the 2024 season. This fundamental shift brought speculative buying which largely fueled the rally. As with any market, this type of market participation creates volatility, and the story can change quickly. Following the February high, cotton quickly fell to five-month lows. Escalators up, elevators down. With each new low, the funds panicked and exited long positions which created a fast and furious fall. This is exactly how the cotton trade became known as the “widow maker.” It was brutal to watch but reiterates why hedging is important anytime multi-year highs are printed in any market.
This story is vaguely familiar to the action in grain markets, albeit over a much longer period of time. Regardless, this is why technical levels of support and resistance remain vital. If the funds are going to exit their current short positions, higher prices will force them to exit quickly to salvage profits. Like the quick exit in cotton, the action could create a fast and furious rally.
Still, grain markets are lacking a story to ignite that move. All three major grains are plagued by oversupply and slow demand. While arguable to some degree, the U.S. Department of Agriculture has failed to print a change to the current market sentiment. Love or hate the USDA, the trade relies heavily on their data. Until that changes, grain markets in general will remain vulnerable to money flow and outside market movement, both of which have plenty of moving pieces to keep volatility alive.
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In contrast to grains, outside market news items are constantly shifting. While geopolitics remain a wild card in the year ahead, inflation is a top concern. As we are all well aware, the outcome remains highly debated but U.S. stock markets are continuing to hold near all-time highs. Even the recent pull back from all-time highs doesn’t doesn’t even touch a 10% correction — yet. When that happens, the tables could turn quickly. With that, be prepared for the doom-and-gloomers in the market to preach the “sky is falling” on any correction. Just remember, that doesn’t mean we are going to experience similar situations to 1929, 1987 or 2008. Will the move be historic? No one knows, but a “reality check” scenario seems more than warranted. In general, that would be friendly for commodities and could certainly be the item to keep futures supported through the growing season.
These outside market topics are getting repetitive, I get it, but barring any weather or other supply/demand developments, they will continue to impact market direction. With that, it’s planting season and the headlines are quickly shifting as the market seeks new topics for price discovery. Finally. In fact, this past week may have been the first time we have seen the market respond to U.S. weather in 2024. With the timeline for a potential weather market approaching, it has many in the trade anticipating a weather rally.
Interestingly, this week may have been the start. Grain futures across the board experienced a three-day rally, the first for corn and soybeans in three months. Most of the movement was based on anticipated planting delays with widespread rains moving across the Midwest this coming weekend. In fact, some areas of the Corn Belt could potentially receive more than 3 inches of rain. Whether that happens, in a large area, could certainly slow progress going into the month of May. Just remember, weather markets are volatile.
If the rains fall as expected, markets will react and the rally could be extended. On the other hand, if the system fails to develop markets will quickly give back the recent weather premium. In the end, this weather event could be vital to price movement in the near term. Remember, the funds were still holding large net-short positions at the end of last week. Price movement this week likely proved the funds moving out of short positions. The question remains on whether this movement is another short covering rally or the start of a turn higher. In the end, it could greatly depend on this weekend's weather.
Keep in mind, we are dealing with the futures market. The trade is constantly looking forward not backward. Particularly, two weeks out. If the two-week forecast looks for improving conditions, grain futures will react. On top of that, global weather headlines are also catching the trades attention. Especially for wheat exchanges. Not only are parts of Kansas, Oklahoma and the Texas Panhandle causing concerns for U.S. winter wheat, but Russia and Canada are also facing dry conditions. South America remains a top concern for corn and soybeans as Brazil turns drier. Interestingly, currency trade is also coming into play for South American supplies, but that is a topic for another week.
Regardless, demand is another major influence for cash prices. This week, despite the sizable rally in futures, the basis across the U.S. has remained relatively stable. That's a win/win from a producer standpoint and may be proving better than anticipated demand across all three major grains. Even with forecasts of ample ending stocks, this time of year, weather plays a huge factor in price direction. Welcome to the start of the 2024 weather market season. Just don’t forget, there are outside market forces constantly moving in the background.
Allison Thompson is a market analyst with The Money Farm in Ada, Minnesota. She previously has worked as a Farm Business Management instructor and is active on her family's Mahnomen, Minnesota, grain farm.
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