August 31, 2020

Reviewing 2020 Commodity Prices and Expectations

By David Widmar

A few weeks ago, two Ag Forecast Network (AFN) questions closed without much fanfare. While the probability of Dec. ’20 corn futures exceeding $4.25 and the Nov. ’20 soybean contract exceeding $10.50 were low probability events throughout the summer, this was not the case last winter. This week’s post reviews corn and soybean future prices over the past year and how expectations changed.

The Starting Point

In October 2019, the December 2020 corn futures price was trading around $4.00 per bushel (figure 1). Thinking about the commodity market in 2020, we posed two AFN questions about the probability of the December corn future contract trading outside of the following bounds:

  • December 2020 Corn exceeding $4.25 before August 1st.
  • December 2020 Corn falling below $3.50 before August 1st.

For the outcome to occur, the contract needed to register a trade above (or below) the target. Keep in mind that both events could have happened, especially given that the questions were open nearly nine months (October to August 1st).

At the same time, the November 2020 soybean contract was trading around $9.75 (figure 2), and the following two questions considered were:

  • November 2020 Soybeans exceeding $10.50 before August 1st.
  • November 2020 Soybeans falling below $9.00 before August 1st.

While $4.25 corn and $10.50 soybean were low probability events throughout the summer of 2020, these were price levels talked about, hoped for, and potentially even budgeted last winter. Furthermore, recall there was considerable excitement last winter around the ‘up-side potential’ of what became the Phase 1 trade deal.

 


Figure 1. December 2020 Corn Futures Price. Data Source: Bar Chart (here)


Figure 2. November 2020 Soybean Futures Prices. Data Source: Bar Chart (here).

 

Expectations and The Consensus

The AFN tool allows for several pieces of user feedback, including a look at the consensus – or average – of other active forecasters. Furthermore, AFN helps review how expectations have shifted over time. For example, in early January, the AFN consensus for the December 2020 corn exceeding $4.25 reached a high of 70%. Meanwhile, the probability of corn falling below $3.50 slid to a low of 30% in late February.

In just a few weeks, however, the outlook dramatically changed. By April 1st, the December corn contract traded below $3.50, and eventually fell to a low of $3.20.

With soybeans, the AFN user consensus had a persistently bearish tone. While the range was 75-cents above and below the fall price levels, users forecasted a much higher chance of prices falling. For example, in early January, the consensus was a 60% chance of slipping below $9.00 but only a 15% chance of rallying above $10.50. The contract fell below $9.00 on March 3rd.

It can be tempting to weave a narrative about how or why these consensus changes took place. Such conclusions, however, are challenging given the nature of the measurement. Keep in mind the average forecasts of active users drive the consensus. That said, not everyone forecasts across all four questions. Furthermore, when conditions change quickly – as they did in March 2019 – users update their forecasts at different times. The critical part is to review your expectations.

 


Figure 3. AFN Consensus of December 2020 Corn Prices.


Figure 4. AFN Consensus of November 2020 Soybean Prices.

“You win some, you lose some, but always learning.”

While having the top AFN forecast score is fun, the learning is the most important. With that, we’ve included two questions that are worth considering as you reflect on commodity prices and your expectations over the last year. I’ve also included a few of my own reflections.

1) What were your expectations last fall?

Looking back, I am surprised how bearish my expectations were, especially on soybeans. Like the AFN consensus, I forecasted a higher probability for the low soybean prices questions than the higher-priced question.

2) Where did your forecasts go awry?

For most of us, this took place in March and April as COVID influenced the markets, economy, and our daily lives. Specific to my corn forecasts, two specifics observations were:

  • I did not update my forecasts fast enough. A question I should have asked myself when corn slipped below $3.50 is “what is the probability of a 75-cent rally.” I think this would have framed my thinking better.
  • Tunnel vision on $3.50 corn. When corn prices fell to $3.60, I probably became too focused on crossing the $3.50 barrier. In short, while focusing on “will corn fall another 10 cents,” I missed the big-picture shift; the forest versus the tree. I probably did a much better job of thinking about the range of possible outcomes when prices were 25+ cents away, not a dime or nickel.

Wrapping it Up

The price environment we had last winter – as Brent and I were presenting at outlook meetings and producers were making their budgets – is much different than where we are today. While it’s tempting to throw our hands into the air and blame COVID, it’s critical to reflect on our earlier expectations and review our thinking.

At the consensus level, AFN users were consistently skeptical of soybean prices turning higher. This is interesting to consider, especially given the much-rumored and eventually signed Phase 1 trade deal.

Finally, make sure you’re always learning. While conditions and expectations are continually changing, it’s important to review and challenge your thinking. What can you learn? What went well? What went poorly?

Looking ahead – In early October, we’ll launch our corn and soybean price questions for the 2021 growing season.

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