Grain markets have been on a roller coaster since the summer, when Russia banned exports due to drought conditions. Friday, the United States Department of Agriculture (USDA) cut its projection for this year's corn harvest by 3.8%, as reported in the Wall Street Journal.
That news was like pouring gasoline on a fire. The grain markets exploded to the upside, closing limit up. Some exchanges place a limit on how high or low prices can trade on a given day. The limit for corn is 30 cents, for wheat 60 cents and for soybeans 70 cents (each penny equals $50).
What limit up means is that trading is halted. Sell orders can be entered, but its like taking a number in a deli. If someone wants to sell, then maybe you'll get your order off. Usually the opposite happens. The buyers rush in and there are still buy orders waiting at limit up prices.
If you got caught short Friday, you couldn't sell your contract and must wait until Monday. On Monday the market could open limit up again, which means that are losing 60 cents on your corn contract. This recently happened in the pork belly market, where the price was limit up for several days.
The problem of grain shortages is worldwide. China is buying about a quarter of our soybean and cotton crops. Corn reserves are the tightest since the mid 1990s. The carryover for corn (what is left over after this year's buying) will be down a whopping 47%.
Already this year corn futures are up 27.4%, wheat up 32.8%, and soybeans up 9.2%. Food processors are already passing on increases to consumers. These market dynamics will not ease up next year. Look for grain prices to remain high and food prices at the supermarket to keep rising.