This is the time of year that we normally see classic old crop vs. new crop trades in many of the grain markets. New traders are often perplexed because current market prices are much higher than the further out contract months, like November or December, yet intuitively you would think that things like crop uncertainty, and carrying costs would require that the further out months should be a higher price than the closer months.
But this is not so.
In order to understand why this is, you first you need to understand the difference between old crop and new crop. The grain markets all follow a regular cycle of planting and harvest, which happens regardless of market conditions at the time.
March and April are the planting months while harvest occurs late September through early November. Therefore March, May, June, August and even September are considered to be “old crop” months. The harvest months, November and December, represent the “new crop”.
When the new crop is harvested, there is once again an abundance of supply. Subsequently late in the year is when many of the grain markets post their lowest prices of the season.
However, given the currently situation in the grain markets, where we are well past the harvest but have not begun planting this year’s crop yet, supplies are tight and demand remains strong, with little relief in site until this coming fall.
Even though the new crop has not been planted yet, given the current shortage in supply, it is safe to assume that farmers will be planting corn, wheat and soybeans on every square foot of soil they can find. Therefore when the harvest does finally come, the supply pressures should be eased somewhat.
However, prices are likely to remain strong in these markets until the crops get through the critical planting stages and the risk associated with the summer heat and drought, before we can expect to see a serious break in prices.
Rest assured however, that the break will come –eventually. As the grain traders in the pits like to say, “supply happens”.
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