Weekly Market Update – July 30, 2021

While the volatility this week would have seemed really high in late July of last year, it was relatively calm compared to the last 6 months. It has been extremely hot in much of the country, including the areas that have been in a drought for the whole year. Some parched areas did get at least some rain before going into the heat, but despite that rain condition ratings slipped lower again this week surprising the market which had expected marginal improvement.

Condition ratings
The corn crop this week was rated at 64% good/excellent compared to 65% last week and 72% last year. Looking at just the overall stats does not show the whole picture this year as there are some very high poor/very poor ratings. On the national stats, we have 10% poor/very poor compared to 7% last year which is not that big of a difference. But in North Dakota 39% of the crop is rated poor/very poor, 25% in South Dakota and 21% in Minnesota. The Dakotas are not the heart of the corn belt, but they make up a lot of the acres that were added this year to try to gain some cushion in the balance sheet. Those areas also have the least chance of weather improvement in the long term.

Similar to corn, beans saw a drop in national condition ratings rather than improvement after much rain. 58% of the soybeans were rated good/excellent compared to 60% last week and 72% last year. Once again looking at the poor/very poor stats, nationally 12% of the crop falls into those categories which compares to only 6% last year rated poor/very poor. That is a significant change compared to last year. Looking at the hardest hit states, North Dakota has 41% rated poor/very poor, 26% in South Dakota and 20% in Minnesota.

These rating drops have come after some of best rains for the parched areas. The market was expecting at least small improvements going into the extreme heat we had this week. We will be looking for a drop in the good/excellent categories next Monday and an increase in the poor/very poor.

The weather has been extremely hot this week for much of the country. There has been some rain across the Midwest but came in the form of thunderstorms which were more spotty in coverage than some of the maps seem to indicate to the traders in Chicago. One thing we have to remember in a weather market is that the market is not trading as much due to the current/nearby weather as the future weather. Theoretically, the market should have already priced in the weather we had this week and the only reaction to it would be if the observed was significantly different than expectations. The market is trying to price in the weather for the rest of the growing season. That is the weather that is changing significantly with each model run because there is so much uncertainty predicting out that far.

So what are the weather models saying for the next few weeks? There is very little agreement right now between the models for the next few weeks. When the models disagree this much, it means they do not have much confidence in the forecast. When all the models show close to the same thing, they are generally more accurate. Generally they show a cooldown from these extreme highs and then some heat building but they are not confident where exactly the borders of that heat will be. There is more moisture trending into the forecasts for the eastern corn belt and parts of Iowa but very little or none for the extremely parched areas of the Dakotas, Canada, and Minnesota.

The weather is uncertain. The yields are still very uncertain. We know very little about the crop this year for the end of July.

Exports have been quiet. China has not made any big purchases from the US in about 6 weeks now. However, there are rumblings they sold back corn that was purchased from Brazil at a big profit. If confirmed, that would mean they may be shopping in the US to replace as South America is completely tapped out. Brazil is buying in corn from Argentina already. The frosts that hit the late crop in Brazil has not been fully recognized by USDA and that will dramatically change the balance sheet. Export loadings on Monday were exceptional. China is making an effort to take delivery of as much as they can even with prices going to be lower at new crop. They did cancel some old crop corn sales and replace them with new crop ones which showed up on the export report this week. There have been rumors of the Chinese buying beans from the US soon. If that happens it will show that Brazil is already tapped out of beans too. Brazil should be the cheapest offer until we get into harvest in the Northern Hemisphere.

Outside Markets
The Federal Reserve this week seemed to walk back comments indicating they would start slowing bond purchases. They still believe the inflation pressure is only temporary and the economy still needs support with the resurgence of the case numbers. This is bullish for commodities and bearish for the US dollar as they are going to not even let off the gas pedal of the easy money policies.

What To Do
Most of what I have written above is bullish. The things I have written about are the known unknowns. We know how weather will affect the market, we just do not know what the weather will be. Same with yield. If the weather turns wetter and or the yield is higher than we expect then the market will have some downside. There are also unknown unknowns that could threaten this market. Something coming out of left field that the market does not anticipate. We are at very high price levels and should be very profitable at these levels. We have good prices and in most areas potential for very good yields. I have made a case for why the market could go higher, but we should also be scaling in sales.

You do not have to sell on down days and can reach with some orders a bit. $5.75-$6.00 corn and $13.75-$14.00 should be easily achievable with a change in the weather. If you are undersold, get some orders working.

Spring wheat is still a disaster and has not much chance of rain. The amount of wheat rated good/excellent is 6% (66% poor/very poor). One thing that has sparked Chicago wheat is now some heat building in the former soviet union. It is one thing to lose one wheat class when we still have a buffer, but like the other commodities as we see the buffer start to decline, the market has to react quickly. We are also in an environment of rising commodity prices in general which is adding to the upward pressure.

Old and new crop wheat over $7 is a place to be thinking about some hedges. Same story as last several weeks on basis. If you need to move bushels before corn, homes are very very limited now. Oct/Nov/Dec and Jan/Feb/March milling basis is going to be very strong.

Cotton acres are higher than what were anticipating and the weather in many areas of the cotton growing region has been much better than usual. The cotton belt in Texas has gotten exceptional rains. The delta had too much rain early in the growing season but that crop has come a long way as well. The best thing cotton has going for it is demand. There should be plenty of places for the cotton to go as long as the economy continues to expand. If that expansion is threatened due to increased cases cotton will be the first to react. We need to be selling cotton around 90 cents. There is room for upside if we continue to grow but downside is more threatening for cotton than the grains. Sell cotton at 90 or better. I would be getting protection on up to half your crop at 90 cents.

This graphic shows the changes from last week. You can see that not many areas had any improvement and the drought stricken areas actually had some slight degradation.