The one thing that has been constant this summer is the volatility. Last week we got a huge gift from USDA and before we knew it, the market took it away. The main theme this week has been rain that has fallen and more rain in the forecast for the whole corn belt but especially hardest hit areas of the western corn belt. The fact the holiday fell on a weekend meant there would be three days of weather model runs that could not be priced in with each update. This is a very crucial time of year for weather forecasts and the market is especially on edge due to the tightness of the balance sheets. With each model run over the weekend, the forecasts continued to add precip. That is why the market reacted so dramatically on Tuesday when trading resumed. After watching the precip totals, everyone was expecting a lower trade but I think the limit move surprised just about everyone. One reason for added volatility is a lack of open orders in the market right now. There are many years when I have pages of good until canceled orders working through the summer. The markets ran so high so fast it hit almost all the wish orders people had working. It has dropped so quickly many times that it has hit orders that end users have had working. Without large volumes of resting orders, we rely more on day traders and funds to provide daily liquidity and they can be very fickle. When the ball starts rolling down the hill, it can trigger more margin call selling and build more momentum. That increases volatility in what was already going to be an extremely volatile period.
Of the 1.54 million acres of corn added from the March intended plantings report, 1.2 million (78%) of them were in the Dakotas and Minnesota. Those states and much of Iowa have absolutely no subsoil moisture reserves and are relying on rains to provide all of their weekly needs. Much of the corn in those hard hit areas would have been dead before pollination without the rain over the weekend and what is forecast through next week. This rain was a crop saving rain but it is far from a crop making rain. They need way more than just one soaking rain to make a crop, but this rain stopped it from dying. They need to get all of their weekly moisture needs from the sky because it is not in the soil. Last year we lost several bushels of yield when the rains stopped in July and August in the western corn belt. This year it is more crucial and the crops do not have a good start. It is possible that they get weekly rains and salvage some yield more than a disaster. If they get rain each and every week now through the end, the highest prices are likely in the past but I think there are slim odds of that. There is too much demand and supply is too tight and the market is still on edge. Soybeans have the same threats as corn but the balance sheet is even tighter. They have more time to get the rains, but they still have to get it to make anything.
The other information we got this week was from CONAB (Brazilian equivalent of USDA) who reduced their estimate of Brazilian corn production to 93.3 mmt. This is down from their first production number of 102 mmt and down significantly from USDA’s June estimate of Brazilian production of 98.5 mmt. The market was looking for a number under 90 so it was somewhat disappointed and traded sharply lower after the release as a result. It was later reasoned by several analysts that their estimate does not include damage from the very recent early frost so the market still expects that number to come down further. USDA will have to update their estimate on Monday as well. Tight world balance sheet gets tighter.
USDA gives us updated supply and demand estimates on Monday at 12pm eastern. It is very rare for them to adjust US yield this early. I think if the western belt had not gotten the rains last weekend, they may have been forced to lower yield already but the rain bought some time. With the lower acres from their final planted acreage report, I do not think we need a yield reduction to remind the market how tight we are going to be. USDA has been behind the curve on lowering carryouts for several years now and I do not expect them to be in a hurry this time either, but there are some things that are going to have to be adjusted. We are going to have to export more to cover for the losses in Brazil. They are going to have to reduce Brazilian production. Ethanol usage has been too low on earlier reports. We have record ethanol production and stocks continue to draw down. That is not bearish.
This report should be a wakeup call to the market and a reminder that even with trend yields, we are not going to add much back to the corn balance sheet and may go backward on beans. The weather matters more than USDAs opinions, but this should help put the weather in perspective.
African Swine Fever (ASF) in China
This is a story that has been rumored for a while and it is impossible to get a good handle on it due to the Chinese censorship and manipulation of news stories. Hog prices in China have come down significantly which could be a sign of mass slaughter to try to get ahead of another ASF outbreak, but China continues to import huge amounts of pork from the US which would be counter to that argument. They have released many news stories about resurgent ASF and also news stories about getting the cost of domestic feed grains down. They may be playing up the ASF in the foregin media to try to push world prices down. It sure feels like a pump fake right now, but it is a story we need to continue to watch closely.
What To Do
We are back toward the lower end of the range now on corn and beans. I would like to get past the USDA report Monday and be looking to scale in more sales after that. We have a corn crop that is almost made and a bean crop that is coming along very well. If you need to move corn at harvest, you need to be shopping around now. We are a deficit market for corn, but cannot ship it all at one time. There will be some huge early bean premiums but harvest basis on beans is still very strong. I would be making some harvest basis sales but just on basis not futures.
Spring wheat is still an absolute disaster. Wheat has been weighed on by corn but has not been nearly as beat up. They are starting to talk about dryness in Ukraine and Russia which is too late to negatively affect winter wheat but will be detrimental to spring wheat. If you need to move wheat before corn, you need to get on it now for both feed and milling. Basis after corn harvest should be at historic highs this year as so much of our Southeast wheat is going into a feed ration. We will be trading at or close to rail values this winter. If you have good wheat in the bin, take good care of it!
Cotton did not get the huge boost from USDA that we were expecting. Acres were not down near as much. However, that does mean the weather has gotten any easier on cotton. It’s hard to believe we could see too much rain in so many areas of the cotton belt. General feeling that the economic recovery is not as quick as earlier expectations has weighed on cotton. Exports have been decent. I still think cotton is going to make a move above 90 cents, but we keep hitting resistance at 87 cents. Still be patient on cotton.