Weekly Market Update – August 2, 2019

Corn has broken through the major support at $4.20 on fund selling due to non-threatening weather forecasts and perceived lack of progress on China trade talks. The first face to face meetings in the last few months were held this week. The only announcement after the meetings was that the next round of face to face talks will not be held until September and Trump is back threatening tariffs starting Sept 1, all of which the trade perceives as negative. The long term forecasts are all starting to trend cooler and dryer for much of the Midwest but the trade seems to be discounting the dryness due to the lack of heat. Lower than seasonal temps will help the crop use less water, but it will not help accumulate the GDUs it needs to get to maturity before frost. There is no use talking about when a frost will be because forecasts out that far have almost no accuracy. All of this says the trade has very little firm information to trade on. A bull market needs to be fed every day and it has been a long time since we have had any new clearly bullish news. All eyes will be on USDA’s  Aug 12th report. This will be one of the most important reports we have seen in a long time. 

We know basis is going to be very strong this year, but some end users are trying to hold their cards close until harvest starts. Some of the end users are going to work together to try and keep the harvest basis as low as possible but no end user can afford to miss local bushels. All it will take is one of them to get worried they are missing bushels and they will all follow suit.

We need to be looking hard at pricing some new crop. It did not rise to the highs that Dec 19 got to, and it has also not fallen nearly as much. It is still trading around $4.10. Even with normal basis that will net $5 corn. Since this is a supply driven rally, we can fix it in one year with big acres next year.

Soybeans have also broken major support due to fund selling on non threatening weather forecasts and lack of progress with China on trade. The announcement that the next face to face meeting with the Chinese delegation will not come until September spooked the market yesterday and Trump’s announcement of additional tariffs added fuel to the fire today. Much like corn, soybeans in the Midwest need heat units to try to make up ground, and as the days get shorter beans are running out of time. But a bull market needs to be fed and we do not have much until USDA on Aug 12th. We have big old crop stocks to buffer and with lack of progress on trade beans lack a spark right now to provide support. Beans have more downside than corn due to the old crop stocks.

Similarly as corn, bean basis will be strong due to the Eastern belt being the hardest hit with planting delays, but with the old crop buffer basis will probably not be at historic levels as corn basis may be. Sales should be made with hedges as posted harvest basis levels do not reflect this yet. There will also be some basis premiums for early beans.

Wheat was finally starting to gather some strength as crop estimates around the world are being trimmed and world prices were starting to get closer to competitive with US prices. Wind coming out of corn has weighed on wheat. Wheat basis remains very strong if you have milling wheat to move. Some mills are full right now, but they will not stay that way long and many are not.  

Cotton had great exports and a spark of life until the announcements on trade today. Weather in the US is very good for cotton so we need a deal with China. One thing cotton may have going for it is a huge fund short position. They have built such a large short, if something would spook them we will get a significant rally. August 12 report will probably not be friendly for cotton but the question is how much of that is already priced in.