All of us on the producer side of the market would have preferred a quick shallow correction and then a run back to the old highs we got a brief taste of but that is not how the market works. It had run so far so fast, higher prices were not going to bring any more grain to market. It needed to drop to remind everyone that it could. All these markets still have a lot of positives. Before I get into the changes that we have seen this week, I want to give the second installment of “Grain Marketing is More Psychology than Mathematics.”
The adage is that the market tries to inflict the maximum amount of pain on the maximum number of people and it does a dang good job at that. This market will take years off your life if you let it. If our happiness was just based on where price was, we should be the happiest we have been in five years. But it is not that simple. The last few weeks as this market has pulled back off the highs has made many people feel like all is lost. I challenge everyone to try to focus on a wider perspective. Do not just compare where we are right now to where we were two weeks ago, look at where we are compared to where we were a year ago. We are higher than we imagined possible compared to a year ago. With any kind of yield we are going to make real money this year. If you can get yourself to stop stressing and worrying about what happened in the past, you can make better decisions about what you need to do in the future. You have no ability to change the past, but you have the ability to make decisions for the future. Discussing the things we know as well as the things we do not know so that together we can make good decisions for the future is my job.
Rain makes grain. The crops got planted and for now are getting rain. Informa Economics came out last week with a massive acreage number for corn at 96.85 million acres (USDA was at 91.4 mln) and 88.5 mln for beans (USDA at 87.6 mln). USDA estimated corn carryout for 2021/2022 at 1.5 billion bushels which is tight but not $8 corn tight. Those are some of the main bearish factors that have been weighing on the market. As for the rain, it is much needed but since so much of the Midwest went into the growing season with zero subsoil moisture reserves, they are going to need to get rain throughout the rest of the summer. As for Informa’s estimate, I agree acres are going to be higher but there is much debate about how much higher they can be.
Over the last 10 days, China has bought 11 million metric tons of new crop corn that we know of. That is 433 million bushels. USDAs estimate for the whole year is only 26 mmt and they bought almost half of that in 10 days. We have four or five months worth of demand in a little over a week. See the graph below to see how historic this pace is. I see this as a choice between believing USDA or believing China’s actions. China has been much better at reading this market than USDA. In addition to the record amounts they have bought from us in the last few weeks, we also have reason to believe they are buying from other countries. China claims they have adequate stocks, but the prices in China and the massive buying binge leads us to believe otherwise. They are making some purchases that will not be shipped until next spring and summer. Why would they be buying so much for so far out if they did not see much higher prices coming?
Noone knows what the summer weather will be. We got the crop planted in good conditions and got it started right but we need a massive crop and normal demand just to get 1.5 billion bushel carryout. Demand is far from normal. Gas usage is almost back to pre-pandemic levels and trending higher. Ethanol grind is building. Domestic feed usage is going up. Export demand is off the charts. If we get any production hiccup anywhere, the market is going to respond dramatically and violently.
Beans have not fared as well as corn this week. The South American crop did not drop as much on beans as the second crop corn did but US projected tightness in beans is much more acute than corn. China is buying Brazilian beans almost as fast as they are buying US corn. Domestic basis seems to have leveled off for now but is still at historic highs.
What To Do
Do not lose sight of how high we are just because we were higher two weeks ago. There is nothing wrong with making some sales at these levels if you have done nothing. I still believe there are higher prices ahead on any kind of production hiccup, but there is no guarantee of that. We are hot and dry and our production is unknown so percentage of production is still a very wide moving target. Those that are under 25% sold on corn and beans are the only ones i would be encouraging to consider additional sales right now. I am also starting to think about calls against existing sales or courage calls against future sales.
Kansas wheat tour found near record wheat yield surprising the market after the adverse winter weather. There is one caveat to that which is the tour is later than normal and had to try to adjust their formulas for estimating yield so we will see where yield ends up. KC wheat has taken that much harder than Chicago. World wheat prices continue to firm which brings the US back to be competitive on the world market. Russian crop estimates are down from USDA’s last estimates. The corn wheat spread ran out to over 80 cents and has now come back into less than 10. Some poultry feeders in the Southeast are starting to bid for wheat through the summer showing how tight corn will be. Poultry does not utilize wheat as well as other animals making them the last ones to incorporate it into the ration.
As soon as you start cutting, get your wheat quality tested. If you have no chance to make milling grade, you can sell it as feed and be done. If you do have quality wheat, there may be big premiums even if you do not want to carry it yourself.
Beneficial rains and overall commodity selling has weighed on cotton. The rain will save some of the crop but we are still looking at significant tightening of domestic and world stocks. Good macro readings in the US and now hopefully in Europe should unleash pent up demand as well. Cotton should get back to mid to upper 80’s.