This has been a pretty ugly week in the markets. The tough thing when looking at these markets is you do not know until its too late if it is going to be just a temporary setback or if the market has turned and the highs are behind us. A move like we saw this week should have us all questioning that. You do not necessarily always need to change your plan as soon as the market does something unexpected, but you should be evaluating it.
Sunday night, beans tried to break through $12 and corn made new highs. By the time we came into work the markets were lower and have been on the defensive all week. As strong as this market has been, it should not be a complete surprise to have a pullback. This correction has eliminated the overbought condition that technical traders watch.
A few things sparked the selloff. There has been some rain added to the forecast in South America. We started the season with strong La Nina indicators which typically means lower than trend yield in South America with Argentina taking the biggest hit due to dryness. It has been very dry in South America for the whole growing season but a lot of meteorologists are pointing out that it is not necessarily in the same areas that are usually dry in a La Nina year. Big production areas of Brazil that are not typically so affected by a La Nina cycle are also very dry this year. One reason for the pullback this week is there has been some rain added into the forecasts. It does not appear to be enough by itself to break the moisture deficit but the market is trying to figure out if it is a signal the dry trend is now changing. All next week the market is going to be watching to see if what actually falls is what was forecasted. If it is less, that will give the bulls the edge. There is still a lot of growing season left down there and they have accumulated huge precipitation deficits and very few analysts have trimmed much production yet. I think the odds are still very much in our favor for the weather.
Another factor contributing to the selloff this week was the absence of the Chinese this week. They have been buying beans at record levels up until now but have gotten quiet. We are not sure what to make of this yet. They may be watching the South America developments before continuing. Typically they buy US beans as a hedge against a South America weather problem and this year with the balance sheet so tight, they have to buy beans from whoever has them regardless of politics.
We get USDA’s latest estimates next week on Thursday (Dec 10th). Historically, when each previous report lowers yield, the December report continues that trend. However that means the market is expecting another cut so the reaction will be to whether the market expected more of a cut or less. The last few reports have been beneficial to the bulls and if making a guess right now, I would lean toward this one continuing that trend.
There is a big positive that has not really been felt this week due to the weather trade. The Brazilian currency has gotten a lot stronger this week. It is making multi month highs which makes South American crops more expensive to China compared to ours. The US dollar has also gotten weaker. This will be a benefit to us, even if its not having that big of a visible effect right now.
The market has hit resistance at $12 twice. A bull market needs to be fed continuously to keep going and we have run out of news in the short term. We need to see the outcome of these rains next week to see where the market goes from here. We need another story line to break through $12 to make new highs. USDA or South American weather or China coming back to the market all seem to be likely candidates to provide that. We do not need to panic sell here, but if you have not sold any in a while and/or have a lot of beans left to sell, we can still get over $12 in most markets and there is nothing wrong with selling $12 beans. You would also not be wrong to sit tight if you have been scaling in and want to hold the last few bullets and see how the weather plays out. There is a lot of growing season left and time is on our side right now. If you have not done any new crop, i would do a little but be patient on getting too aggressive. Acreage allocation is going to be a fight in the US and there should be opportunity to price on that.
Corn has held on better than corn this week as not as much has changed on corn. USDA report next Thursday will set the tone for corn. The market is trying to price in the rain in South America but if Chinese demand is close to where it is rumored, corn should be able to resume the uptrend. Corn prices in China are trading near $10 per bushel and US corn is priced well below Brazil, Argentina and Ukraine. The dollar getting weaker this week has only helped.
Similarly to beans, if you have done nothing in a while you would not be wrong to hedge a little bit here. We are off the highs but still at very good price levels. However if you have been scaling in until recently, i would take a chance on the remaining bushels. Rail has started to run a little better but be ready for train delay opportunities. Do not sell posted basis levels anywhere. Get a little new crop over $4 which should be $5 delivered but do not get too aggressive yet. It is still bone dry in the US Midwest too.
Wheat has had some volatility in both directions this week. Wheat does not have the tight balance sheet that is driving corn and beans. But it cannot get too cheap or it will go in the feed ration and it cannot get too high or it will slow demand. Russia is giving a lot of mixed signals about the old crop export controls but big crops in Australia offset some of that uncertainty. Hedge new crop above $6. Sell old crop above $6 as well.
Cotton has been in a downtrend this week but seems to be trying to bottom out. Good exports and a weaker dollar have helped support cotton. The additional risk this week came from a Trump Administration move to ban cotton and cotton products from a Chinese quasi-military organization that is accused of using the forced labor of Uighur Muslims in China. The market is concerned about retaliation by China not importing US cotton.