Producers face a challenging situation when low commodity prices and high-interest rates combine. However, this combination could lead to a self-correcting market.
Corn producers have enjoyed historically high prices for the past two summers due to various factors, such as excess speculative liquidity, inflation hedge inflows, weather conditions, and political tension.
This week, the good times abruptly ended as cash market corn prices dropped below $4 for the first time since 2020. In certain cases, they even fell below the cost of production.
Farming is expensive, and most farmers require operational loans for equipment, land, and labor. This week, the cost of borrowing for farmers was nearing 10%. The low commodity prices and high-interest rates are the worst-case scenarios for producers, but this situation could lead to a self-correcting market.
The financial pressure could lead to reduced supply in the coming season, which leads to higher prices. However, there are supply concerns in this environment because low prices work against the incentive for aggressive corn planting, and the high cost of capital makes it difficult for farmers to invest. Unless demand falls significantly, the market is likely to remain firm.
When commodity prices are high, producers may become complacent with their spending and less cautious with risk management. However, this behavior can lead to inefficient practices and bad habits that can harm their business when prices inevitably decrease.
In the case of oil production in 2020, many small operators were forced out of business due to low prices and a lack of affordable financing. Something similar may occur in the corn industry, with a possible selloff leading to low prices during harvest season.
Nevertheless, sub-$5.00 corn is likely too cheap for the current environment, and producers should focus on hedging price risk and practicing sound money management.
In the next year or two, there may be a competitive struggle for survival, but this difficult time could pave the way for increased prices in the future.
Corn Long (Buy)
Enter At: 474.625
T.P_1: 486.625
T.P_2: 497.125
T.P_3: 508.75
T.P_4: 522.125
T.P_5: 532.75
T.P_6: 550.125
T.P_7: 565.125
T.P_8: 577.50
T.P_9: 600.00
T.P_10: 617.25
T.P_11: 638.625
T.P_12: 666.625
T.P_13: 688.25
T.P_14: 706.625
T.P_15: 725.00
S.L: 439.125
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