Two of the most important agricultural row crops in the world are corn and soybeans. Those countries fortunate enough to have regions with suitable soils and adequate rainfall to grow these crops have a major economic advantage over those countries that do not.
The United States is the world's largest producer and exporter of corn and soybeans. Therefore, the planting, growing season and harvesting of U.S corn and soybeans have a major impact on the world prices for both. World prices for corn, soybeans and wheat markets are determined on a daily basis in the trading pits at the Chicago Board of Trade and on CME Globex, via its futures markets.
During the U.S. planting and growing season (May through September), market participants form ideas about the potential size of the U.S. corn and soybean crops from a variety of fundamental factors, but mostly from weather patterns in the U.S. midsection—specifically the “Corn Belt.” The states comprising the Corn Belt include eastern Nebraska, Iowa, Illinois, Indiana, Ohio and southern Minnesota.
In recent years, South American countries—namely Brazil and Argentina—have become major corn and soybean growers and exporters. Brazil now rivals the U.S. in soybean exports. Just when the U.S. harvest season is winding down in the autumn for corn and soybeans, the South American crops are entering their critical planting and growing seasons. Trader attention in the market place then turns from weather patterns in the U.S. to weather developments in growing regions of Brazil and Argentina.
Mid- to late-July typically finds the hottest weather of the year in the U.S. Corn Belt. This time period coincides with the extreme-heat-sensitive pollination stage of corn crop development. August is the most critical growing month for U.S. soybeans.
The autumn (September-November) finds the U.S. corn and soybean harvest occurring.
Weather is the primary factor that impacts corn and soybean futures prices. Too much rain in the springtime can delay corn and soybean planting progress and be bullish for grain futures prices. Too little rain in the summer months can stunt crop growth and reduce yields. Such usually prompts the “weather markets” in grain futures that occur in some degree virtually every year. And an early frost in the fall can put a premature end to the growing season for both corn and soybean crops.
Other “fundamental” factors that impact corn and soybean markets include the economic health of the major world economies, which drives the demand side of the equation for corn and soybean markets.
Geopolitics and trade agreements between major countries are also important fundamental factors for grain markets.
USDA, the prime supply and demand source in grain markets.
Official supply and demand information on major U.S. crops, and crops worldwide, comes from the U.S. Department of Agriculture. The National Agricultural Statistics Service (NASS) of the USDA is the primary provider of public information relative to potential U.S. crop size. The USDA has a website at www.usda.gov, which provides comprehensive supply and demand information on all major U.S. agricultural markets, and on a very timely basis.
Each month the USDA releases an updated supply and demand report on corn and soybeans, as well as wheat and other major U.S. crops. These reports offer some of the most market-sensitive information for grain market traders to digest. Other periodical USDA reports include
the estimate of planting intentions released in late March, the estimate of actual plantings and planting intentions in June, and the forecasts of yields released each month from August through November. The USDA estimates actual yields in its January report, following the U.S. harvest in the fall.
Importantly, all USDA data is protected against early disclosure at every step of the forecast process. This is because of the highly market-sensitive nature of the government statistics.
USDA daily and weekly export sales data are also closely watched by grain market participants. Monday of every week finds the weekly grain export inspections report released at mid-morning. On Thursday morning the Ag Department releases its weekly export sales report. And on a day-to-day basis fresh grain export sales are reported by USDA.
One other major fundamental news source is the annual Pro Farmer Midwest crop tour that occurs every year in late August. Crop scouts spread out over the Corn Belt to assess the quality and size of the U.S. corn and soybean crops. Grain futures markets react to the daily reports coming from the crop tour.
China is a major grain market player.
In previous decades, U.S. grain exports to Russia and the former Soviet Union were paramount and moved grain futures market prices significantly on any new developments on that front. In just the past few years China has taken over the role as a major importer of U.S. corn and soybeans. China is growing more grains, but its huge population needs significant food and feed-stuff imports.
The past two years have seen China’s economy take over the number-two spot in the world, behind the U.S. In the coming few years it is virtually assured China’s economy will overtake the U.S. as the biggest in the world. As China’s citizens become more affluent, they will demand more meat, including beef. Such increased demand will impact demand for feedstuffs that include corn, soybeans and soybean meal.
The run up to the all-time high of $17.89 a bushel in nearby soybean futures during the summer of 2012 was due in part to solid demand coming from China. Nearby corn futures hit an all-time high of $8.32 1/2 a bushel in August of 2012—also due in part to demand for U.S. corn coming from China.
Bio-Fuels, an important component of corn and soybean production.
U.S. government fuel self-sufficiency mandates in recent years have helped to ramp up alternative fuels, including biofuels that are derived from corn and to a lesser extent soybeans. Ethanol production in the U.S. is now a major factor in corn usage and corn futures prices. Ethanol is blended with gasoline. There are critics of ethanol use in the U.S. and the long-term viability of corn-based fuels is still unclear. Either way, an increase or decrease in the use of corn- and soybean-based fuels in the U.S. will be a significant price factor for corn and soybean futures prices in the coming years.
Cash “basis” is very important in the grain futures markets.
Commodity futures markets are mostly based upon some type of underlying cash or physical market, which serves to keep the futures market price fairly valued and actively traded. Cash basis in the grain markets is extra important.
In the corn futures there is the “cash” corn that farmers harvest and deliver to their local elevators. Many cash market products that have CME Group futures markets are actually deliverable at designated locations to offset an existing position in the futures market. Grain futures are one example of a deliverable commodity against existing futures market positions. There are some futures markets that are cash-settled only, such as feeder cattle futures and the stock indexes.
Cash basis is defined as the cash price of the commodity minus the futures price of the commodity. Basis can be positive or negative depending on the factors that determine basis. These factors include local supply and demand for the raw commodity, supply and demand for transportation, variations in the commodity’s quality and the futures contract specifications, and the availability of substitutes for the commodity. Generally, transportation expenses makes up the largest portion of cash basis.
Changes in cash basis are not as volatile as changes in cash market or futures prices. Changes in basis tend to follow seasonal patterns. At harvest, grain supplies are generally more plentiful, resulting in a higher demand for transportation services and an increased cost to move grain (weaker basis). Post-harvest improvement in basis often occurs because of increased availability of transportation services at a better price, and improvements in local supply and demand conditions.
Country grain elevators base the price they will pay farmers for their grain on the price of grain futures at the Chicago Board of Trade. For example, a grain elevator in central Nebraska will likely have a wider basis than will a grain elevator located on the Mississippi River in Dubuque, Iowa. Reason: Shipping costs to get grain from the elevator in central Nebraska to the Gulf of Mexico are more than the shipping costs of the elevator located in Dubuque, Iowa, shipping to the Gulf of Mexico.
Changes in cash basis levels are closely watched by grain futures traders, as that can be one clue to future price direction of the market. Commercial entities go to great lengths to keep history and study various cash basis levels for the markets in which they are involved. It is a laborious process. Changes in cash basis levels signal changes in demand coming from the end-users and changes in supply coming from the producers of the raw commodity.
A major reason the corn and soybean futures markets are so popular is not only because major commercial firms and grain producers hedge their grain exposure, but also because the market fundamentals in corn and soybeans are easy for retail or speculative traders to understand and to follow.