Corn & Soybeans
This week was the tale of two markets. First half of the week was for the bulls and the last half has been ugly. The selling was sparked in part by the poor exports reported on Thursday and then accelerated by the forecasts in Argentina trending wetter. There is a good bit of debate about the coverage of the forecast rains and how much help it will provide and only time will answer those questions. It was the spark the funds needed to take some profits this week. But even with some nasty closes soybeans still closed up $0.20 on the week and corn closed up $0.11.
For more years than I care to count in the past, each rally had one main cause. Whether it was too much rain during planting or too little rain during the growing season, there was only one main driving force. We have had some decent short term rallies, but once the condition that caused the rally had abated, the market quickly retraced near where it started and in many cases even lower. For the last several years, you had one chance to sell the rally and then it was over. The fun thing about the markets we find ourselves in today is that we have so many bullish factors now. We have more demand as China rebuilds their hog herds and has to replace domestic stocks they have lied about for years, we have less supply from: USDA monkeying with 2019 crop, 2020 crop hit by the derecho and flash drought at the end of the growing season, production issues in South America and we have a huge inflow of fund money who are buying all commodities looking for returns and hedging inflation. All these factors point to a longer term commodity cycle rather than a short term rally and return.
In the beginning of this rally I encouraged sales to cover costs and service debt. We had to make those sales in the beginning of the rally because we can never be sure at the beginning if it is a short term rally or where we find ourselves now in a new commodity cycle. Do not beat yourself up over earlier sales. That is one of the hardest parts of marketing is keeping your focus forward rather than second guessing all the prior decisions you have made. Lets focus on pulling the average up now.
Now that we have a lot of costs and bills covered, we can be more patient with additional sales. We can be patient with new crop sales. The market does not run straight to the highs in a commodity boom cycle. There are corrections and setbacks and that is what we are seeing this week. Keep your eyes on the longer term rather than the day to day moves. The market has made new highs then sold off a bit and will probably spend the next week or two working back to those highs.
I am preaching patience but not completely ignoring the market. For those that have old crop left to price, keep scaling in small on big moves higher. I do think new highs are coming, but we cannot hold on forever. There is a cost in waiting on the old crop whether it is interest or risk in storing. Bean basis has gotten stronger and should get really interesting soon as the truck lines have slowed down. Corn basis has weakened but all we need is one rail hiccup at one mill to change that.
For new crop, corn is over $4.70 and beans are over $12. There is nothing wrong with scaling in sales here. If your gut is telling you to do a little bit, hedge some. I do not care where the market is going, these are good levels to sell. However, I do not want to go crazy and get a lot sold. USDA added 2 million acres of corn for next year and with trendline yield only projects carryout at 1.552 billion bushels which is only 50 million bushels higher than this year. We think they are still underestimating Chinese demand which will pull that carryout even lower (for this year and next). In a La Nina year, there is a 70% chance of having below trendline yield which would further reduce carryout.
To summarize: Make small sales on new highs in old crop corn and beans, be patient on new crop but you are not wrong to get a few sales on the books just to get started but do not be aggressive.
Wheat has fallen off the highs as the cold weather has abated. There is still potential in wheat since it has not gotten the fund attention that the other commodities have and the carryout finally starts to tick lower. Wheat may find itself in the feed ration in a big way too this summer if corn carryout tightens as much as projected. With $12+ beans and a very wet winter, a lot of wheat is going to be at risk of being abandoned which should help with basis. If you are undersold on new crop, nothing wrong with hedging above $6.50 but I would work orders as high as $6.99.
Cotton like the other grains found new highs before a major correction late week. Bullish macro factors helped propel cotton as well as concerns about acreage. Cotton carryout has seen a dramatic drop over the last six months and now cannot afford to give up any acres. Any old crop left, scale in sales above $0.90 and be patient on new crop. When new crop pushes 90 cent, that would not be a bad starting place.
Soybean Harvest in Mato Grosso
Corn Planting Progress in Mato Grosso