Weekly Market Update – June 25, 2021


Rain makes grain. There is a streak up through the Eastern corn belt that is going to get rain all weekend. Illinois, Indiana and Michigan have excellent crop potential. If these forecasts are realized, this is enough water to start recharging their subsoil moisture and banking some water for a hot dry stretch. This is the story the market is watching. These wet forecasts represent the biggest obstacle for the bulls to overcome right now. There is so much money chasing returns in all the markets we expect the extreme volatility to continue.

The market is going to overreact in both directions and I believe it has pushed further to the downside than this weather event justifies. Weather in the Eastern belt is not the whole story of the US corn crop right now. Iowa is going to miss out on some of these showers and the Dakotas and Minnosota remain critical. According to USDA as of June 22, approximately 41% of corn production area is experiencing drought and 36% of soybean production area is experiencing drought. The only area that is currently in a drought that is forecast to get major rains from this event is Lower Michigan. The rest of the areas that are getting it, do not need it as critically. The Dakotas and Minnosota are careening toward a full blown disaster and condition ratings have been reflecting that. Many think of the Dakotas as fringe corn areas but those three states still account for 20% of the US corn crop. They are also the areas where the market was expecting to pick up a lot of the corn acres. In 2019 MN grew 2.6 million more acres of corn than IN; ND grew 700k more acres than OH did. In the quest to achieve trend to above trend yields for 2021, it is going to be mathematically very difficult for the Eastern corn belt to get yields high enough to make up for major losses in such a big area. Especially since the estimation of trend yield itself counts on the corn belt achieving very good yields. I assert this weather event is not near as bearish as the market is trading it. The rest of the summer weather is going to be much more important and the long term forecasts look more bullish. Eric Snodgrass says there is a chance of an extreme high pressure ridge setting up in July that would bring back the hot/dry weather they saw early in June. Record heat in that area during pollination will get the market’s attention if it comes to fruition.

Yield is half the production equation. Acres is the other half. USDA will give us final planted acres and quarterly stocks next Wednesday and this will be a very big report. Good, bad or indifferent, I will be glad to have this one behind us. I think we have a little less risk going into this report now that we have taken so much premium off the market but there are no certainties with USDA. Private estimates have been all over the board. Informa came out with 5.4 million more corn and 1.5 million more soybean acres which seems too high. FBN released the results of their surveys which showed a mere 1.8 million more corn acres and 1.1 million LESS bean acres. The bean number surprised even FBNs economist but with guesses all over the board, predicting where USDA will be is a crapshoot at best. We know there are more acres than intended. Planted acres are not harvested acres as the disaster unfolds in the western belt. Lots of researchers and analysts have looked at historical changes from intended to planted acres and the consensus seems to be there is no historical precedent for a change as big as what Informa has estimated, but we must be careful using history to set our bounds. Records can be broken.

There are also some other news in the markets this week that I think has had a minor impact compared to the weather. We have seen news coming out of China posted by news sources believed to be state controlled outlets talking about resurgence of ASF in China. That has put pressure on hog prices and grain prices. It does not seem to have reduced grain prices as much in China (but we do not have reliable information about grain prices in China because analysts that printed things that did not agree with the state have been arrested and disappearing). We need to take publications by the state news sources with a grain of salt. They have been saying they are going to crack down on speculators and get commodity prices lower and this story may be an angle to do that. This story has probably added to the downside pressure in the US markets. It should be no surprise to anyone that China has been buying US beans this week.

We also got a ruling by the Supreme Court today that vacated part of the appeals court ruling on Small Refinery Exemptions (SREs). Without getting too deep in details, previous administration was passing out SREs to try to undermine the renewable fuel standard and use less biofuels (ethanol and biodiesel). A lawsuit was brought and the last judgement was by the appeals court which sided with the renewable fuel association and against the administrations actions which were seen as detrimental to the biofuels industry. This ruling vacates only part of that ruling. This was announced today so details and implications are still a bit unknown. We also need to see what the new administration plans to do with the biofuels policies. That has been quite a roller coaster so far.

What To Do
$5 corn futures and $13 cash harvest beans are nothing to sneeze at even with the cost of inputs up. It sure does not seem like a win since we are so far below the highs now but it should still be very profitable. I am not encouraging aggressive sales here, but as our crop gets bigger there is no shame in selling some here. I think there are very good odds of another weather scare in July giving us another run higher. We need to get this report behind us.

Wheat
Wheat has fallen under a lot of harvest pressure from winter wheat but we should get that behind us once we get past July first notice day. Spring wheat is almost a disaster in the US and Canada. They need rain soon. The Russian crop is getting bigger but there is some geopolitical questions still in place.

Feed wheat basis has weakened in the Southeast to give milling wheat a decent premium again. Wheat harvest is in the short rows and once all the feed contracts are shipped, i suspect there will not be much wheat left in the bins. Even though there is not much wheat going to the flour mill, there will still be truck lines for a time due to slow unloads. Milling basis will get stronger going into this fall.

Cotton
Cotton is hanging on better than the other commodities as the forecast rain is not necessarily a good thing in the Delta. Cool wet weather is not helpful for cotton. There is a large consensus that cotton lost a lot of acres so the market is looking for a bullish number from USDA next week. Economies are cranking up which is also bullish cotton. Be patient for 90+ on cotton.