Market Commentary for 8/27/21


Corn and beans continue trading within tight ranges. Yield estimates seem less certain than usual for this time of year. Therefore, a sideways market may be likely until the September USDA report is released.


With so much uncertainty, there are those searching for some sign of where the corn and bean markets are headed. This includes trying to look for similarities in other markets, like lumber and oats. The following looks at each case and illustrates why other market similarities are more likely coincidences than correlated.


Correlation Between the Lumber Market and the Corn Market

Lumber futures awareness entered our daily lives about one year ago when sheets of plywood doubled in price within a few months and seemed to be the new toilet paper shortage craze. Lumber prices rallied more than any other commodity for the first few months of 2021, but then fell dramatically since May as seen in this chart below:

Some traders are concerned what happened to lumber could happen to grain prices too. Like corn, lumber prices were generally range-bound for the previous 8 years and then increased significantly over this last year as seen in this chart:

While lumber has a few similarities to the corn market, there are several reasons why this should be considered just a coincidence. First, just because lumber futures increased and dropped significantly in a short time doesn’t mean corn will too. There are very different factors impacting each market. One, corn is consumed as feed or food and lumber isn’t. Two, lumber production was curtailed during the early part of the pandemic while grain production was curtailed by weather limiting global supply.

Also, the rise and fall of lumber prices this past year was huge. To put it into perspective, it would be like corn prices trading from $4 to $17 and back to $4 within several months. While corn may eventually drop in value, no one knows if that will be in a month, a year, or 2 years. And no one really knows if prices will rally significantly first before a major setback comes.

Do Oats Know?

For decades there has been the phrase “Oats Know” where the rest of the grain futures market is headed. It’s possible this was true decades ago. However, the chart below compares oat and corn futures for the last 8 years and shows there’s only been a few times when oats led the market both up and down.

Despite little evidence of correlation between the oat and corn market in the last 8 years, some in the trade are asking if oats know something and are signaling a corn rally is near. While corn could rally soon, it’s likely just a coincidence. It could be argued that “Corn Knows” more about oat price direction than the other way around as seen in the chart below:

Daily Trading Volume

Another consideration when comparing both oat and lumber futures to corn, beans and wheat are the relatively fewer market participants trading them. On average less than 1,000 contracts are traded daily for either lumber or oats. To compare, following are the daily average contracts traded by corn, beans and wheat:

  • Corn – more than 200,000 contracts

  • Beans – more than 100,000 contracts

  • Chicago Soft Wheat – more than 100,000 contracts

  • Kansas City Hard Red Winter Wheat – more than 50,000 contracts

  • Minneapolis Spring Wheat – around 15,000 contracts

Arguable, smaller traded commodities, like oats and lumber, could actually be easier to manipulate in the short-term compared to the much larger corn, bean and wheat markets.


Oats Are Not a Substitute for Corn

I’ve traded cash oats and oat futures for nearly 20 years. During that time, I’ve often seen the oat market go for several minutes without having a single future contract trade occur, which never happens with the corn market. I’ve also seen a one contract future trade move the entire oat market by 10 cents.

The oat market also has considerable nuance. On a per ton basis, oats are one of the most expensive feed grains and are usually substituted out of most feed rations. Also, the quality of oats delivered against a futures contract isn’t what most food or feed users want to use. Largely oats consumed in the US are imported from Canada or Europe, which means the oat delivery process doesn’t provide the market with a natural end user of delivered oats. These are not issues that the corn market encounters, so it’s difficult to imagine how oats could be a reliable indicator of corn market performance.


Bottomline:

In my opinion, oats don’t really know anything about any other commodity, and since lumber is not a food or feed commodity it isn’t similar enough to compare. Therefore, using oats or lumber futures as a trading indicator for corn price direction probably isn’t a good idea.



Jon Scheve Superior Feed Ingredients, LLC

9358 Oak Ave Waconia, MN 55387 jon@superiorfeed.com

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