While much of the trade is focused on the USDA report released Jan. 12, outside factors continue to drive trade in the grain markets.
The USDA Supply and Demand report was released after publication, but the soy markets continue to carry the flag for the grain rally so far in 2021, largely supported by major impacts to supply rather than demand.
“It is no longer about demand,” Mike Zuzolo of Global Commodity Analytics said. “The parabolic rally in soybeans and meal especially is dominated by supply-side issues — weather and strikes and the like.”
If the Jan. 12 report doesn’t show supply cuts to encourage demand-rationing, Zuzolo said the market will likely be in a correction. Getting to these upper-$12 levels in the soy market has been due to “demand rationing,” Zuzolo said, in a similar fashion to 2007, 2008 and 2012.
In the years Zuzolo referenced, he noted there were sharp breaks lower in the grain markets, with gains vanishing in a fraction of the time they took to show up.
“I’m concerned we are rationing demand too much and will have a pullback after or before the report,” he said. “I’m trying to prepare people for a similar pattern.”
Corn may also be affected by these drops, but likely won’t be as impacted as soy markets.
Zuzolo said China was largely the reason for the rallies, but U.S. corn is at a bargain for the Asian nation, which should provide some underlying support. This is especially true if there are any issues in South America as harvest continues to move closer.
As price levels are at these multi-year highs, there is temptation to ride the wave and see how much higher it can go, but Zuzolo said to exercise caution.
“At the end of the day you have to be a price taker,” he said. “I can’t ask the demand side to meet me where I want to be met every time I go out to plant a new crop.”