It's time to guard against a quick slide in commodity prices

The unexpected bump up in commodity prices going into November begs the question: how long can it last?

“A simple rule of thumb: high prices cure high prices,” say Brennan Turner of FarmLead’s Combyne Ag Trading Network. “I think there’s definitely a combination of factors that are kind of driving the markets right now; first and foremost you’ve got this overbuying, or just-in-case buying philosophy in terms of buyers securing supply that they might not normally need.”

Another element is production issues in countries like China, Morocco, Turkey, the E.U., and Ukraine. “It’s created a bit of musical chairs on the export board,” says Turner.

The third piece of the puzzle is speculative buying from hedge fund and money managers who are pulling out of the futures markets in stocks and possibly even bonds.

Adding fuel to the fire is the fact that it’s hard to agree where China stands on its orders. China tends to cancel most of its purchases in the fourth quarter from the U.S. once it knows what the crop is like in Brazil, according to Turner. They’ve been buying plenty of crop on paper, but following through on those shipments is another story.

The Phase One trade deal didn’t really become active until mid-February of this year, so the first full month was technically March. “The demand and the buying that we’re seeing right now is extremely positive, but as soon as that music stops, I’m very cautious of how quickly people might pull out of the market again, and that speculative money that we’ve seen these last few months” says Turner.

View the full conversation between Turner and Shaun Haney, story continues below player:

Turner’s trading range of discomfort? Looking at a market like canola, historical highs saw markets pull back quickly for the same reasons, speculative buying and excess buying from increased demand, and canola prices were nearing that high at this recording (Tuesday, Oct 27).

As long as the spreads continue between corn and soybeans maintain their bullish strength, there’s not a lot of downside. But, the U.S. harvest is almost done and aid payments will factor in, U.S. farmers will probably pull the trigger and there will be increased selling.

There’s always a cautionary tale of selling too soon before the utmost high is seen, but how much higher does a commodity price need to go, in order to execute the sale?

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