The board of the Federal Reserve met this week and announced no changes for interest rates. They also increased their estimate for US GDP growth from 4.2% last month to 6.5% and inflation from 1.8% last month to 2.4% this month. This is very friendly to commodity markets. Exports for corn and wheat were well above expectations this month as another big sale of corn was announced yesterday to China. Soybeans were within expectations as exports start to slow down from the US this time of year. Harvest has not been going well in Brazil so far but is forecast to get some drying. The second crop corn is still very late planted and will probably struggle all year. Argentina is forecast to start getting some more rain but the damage already done will continue to be debated.
This week has been especially volatile in both directions. Thursday saw a huge selloff in almost all commodities. Energies joined the grains as some of the biggest movers. There are still plenty of bullish factors that are working for us, but bull markets need to be fed everyday and this slow news time before the Prospective Plantings Report has weighed on the markets. Perceived improvement in the South American weather has weighed on the market even though the damage done is not well known yet. Also spooking the market were headlines from both the US and Chinese sides around the talks currently going on in Alaska. Both sides are back to talking junk to the other. In the long run, I am encouraged to see the new administration not just roll over to China but it does add some headline risk when there is negative comments from both sides. Headlines today were more positive and hence the quick recovery.
China has bought huge amounts of corn this week. They have also made announcements of changes in their feed rations. They are trying to use more rice since corn and beans are still so short in China. They do not like being forced to depend on others and are doing all they can to reduce that dependence. Rumors of another African Swine Fever (ASF) outbreak continue to swirl, but it is absolutely vital for the government to get it under control, even more so than before Covid. They can lock their people down, but not if they are hungry. Other rumors that continue to be tossed around are that garbage fed backyard hogs may be what caused the outbreak in the first place and that is another reason why the Chinese government is pushing so hard toward biosecure large farms rather than backyard operations and also why their demand for corn and beans has increased so dramatically.
What To Do
This correction, like any correction, starts raising the fear in the back of everyone’s mind about whether the top is in. The market gives us no guarantees, but looking at all we know right now about the long term fundamentals, this market still has a lot of work to do. It has to encourage enough acres to have a chance to add some cushion to the balance sheet and ration demand. I do not think we need to change our course here. Keep selling small lots of old crop corn and beans on rallies to cover cash needs. Basis on beans keeps getting stronger. Corn basis has not improved as much as expected but is still strong. We can still be patient on new crop but working orders at 12.99 beans and 4.99 corn will not be bad sales. Early new crop basis on beans and corn will be triple digits. The US will be running on fumes waiting on new crop bushels.
Wheat has been weak on much needed rain in the Plains. Weakness in the Russian currency and changes in their export taxes have not helped support the market either. Strength in corn and tightness in summer corn is going to make feed wheat look even more attractive to feeders this summer. A crop is not made until its in the bin and that is especially true for wheat but the crop in the Southeast is looking a little better with some heat and sunshine. The feed channel can suck down as much wheat as we can grow and so even though the flour millers think they are comfortable through harvest, that might quickly change.
Cotton actually held on relatively well considering the selloff in the other commodities this week. I guess it got it out of its system last week. Exports have been very strong and it needs more acres so fundamentally nothing has changed. We have already committed 99.5% of USDA’s projected exports for the entire year so we could easily see the old crop balance sheet tighten up even more. Since the crop is not even planted, we can be patient on cotton here.