This has been a very exciting week in the markets and before I jump into the explanation for the price action I want to make a quick and probably feeble stab at some words of inspiration. The last few years have been rough on us all. All of us have suffered, some much more than others. We watched equity bleed and many questioned why the heck we were even farming. Now is our time. We need to be smart here, replenish the pot of equity we lost and put some away for the inevitable downturn that will follow. We need to try to make the most of our time now, not just in a monetary way but mentally too. We all love agriculture or we would not still be doing it. Let us all try to enjoy it the most we can while we are making some money instead of bleeding it.
Corn & Beans
We have been saying these markets will have a hair trigger for any weather problems and you got to witness just how volatile that can be this week. This is just about all because of the Brazilian corn crop, we have just barely started to look at US weather. The last big bull market we had in 2012, Brazil did not produce very much corn. Now with balance sheets so tight, their second crop corn production is critical. They are pollinating now and this is the last chance they have to get rain on it before they enter the dry season. There are going to be crop write downs, we just do not know how much yet. End users down there are panicking and trying to secure supplies at any cost. Panic is why we have seen huge runups and then sometimes the market just as quickly falls back. Technical traders would call that a key reversal and say it points to more downside but technical trades are out the window when the fundamentals are so bullish. Human nature once in full blown panic does not follow the old chart patterns very well.
We need an increase in acres in the US and trend or higher yield just to keep from trimming the balance sheet even further. There is no doubt in my mind we are going to plant a massive amount of acres. ADM CEO this week said that corn and bean acres could be 5 million higher than USDA prospective plantings estimate. We will not get updated acreage until the end of June. I think there is a significant risk of a correction on that report but June is a very long way away. Look at the drought monitor comparison from last year and this year. Western corn belt is desperately dry. That does not give anyone much confidence in trend plus yields. If you thought the South American weather rally was volatile, just see what happens if it looks like the US is going to have a weather problem. Only their second crop corn was at risk.
European Union is talking about reevaluating GMO restrictions. Which to me is code for “we just now realized we actually need to use GMOs to be able to produce enough food for everyone.” China did the same thing when they realized they would need to buy our corn. All of a sudden they were not so worried about what GMO variety we were producing. It is easy to be picky about your food when you have plenty of it. When you are running out, you have to decide if you are really thinking something is a risk.
What To Do
I foresee the market staying below the highs put in Monday night (5.93 Dec corn, 13.84 Nov beans) but being well supported on the downside until we get more information about US acres at the end of June. I do not encourage anyone to make additional sales on new crop until we get back close to $6 on Dec corn and close to $14 on Nov beans. I will be feeling less patient as we approach the end of June.
We have demand to support us on the downside and let us be patient to see how the US growing season is going to look. If we have a bad growing season, we may set records on corn and bean prices. If we have a great growing season there is some downside. How much downside depends on what demand does and hopefully no meltdown in some other segment.
There is a chart below showing world carryout in terms of days supply. That means that they estimate we will have 139 days worth of wheat at the end of the marketing year. That has been building for the last few years which is contrasted with corn and beans which have been trending lower. Overall, wheat does not need to panic like corn and beans do. Even though wheat is not getting tighter, the market knows that if we get desperate enough for corn enough wheat will get in the feed channel that we can lose that extra. China has been buying US wheat which sparked some of the rally. We also have weather issues building in France and the spring wheat areas of the US and also political risk in Russia and eastern Europe. Even though wheat is not tight, it cannot just roll over.
You can sell feed wheat in North Carolina for close to $7.50. Flour bids for harvest are not much higher than that. Why would you go sit in line at a flour mill when you can dump it and be done with it. The flour premiums are going to have to get better in the winter when all the wheat gets gone. So if you have good quality wheat and want to be patient and put it away and take a chance, you could get paid for that. Or worst case scenario, you can sell it to a feeder for $7.50. This is so much more fun when both choices are good!
There is some rain in the forecast for the Texas Panhandle which is desperately needed. Cotton has been left out of a lot of the excitement so far but that cannot last forever. As long as we continue to see robust economic growth ahead and fears of inflation cotton is going to stay well supported. We may see more corrections in cotton than in the grains due to the lower volumes in cotton but it should continue to stay well supported long term.