The markets were not off to a great start for August. Beans were the leader to the downside earlier in the week as condition ratings came out a little better than last week in soybeans (beans rated good/excellent are up 2% from last week to 60%). Corn was down 2% from last week to 62% good/excellent. I do not think condition ratings alone caused the drastic fall in beans. I think it was a catalyst but then beans fell victim to profit taking and then some margin call selling. Pressure on beans weighed on corn this week while wheat tried to support corn.
Condition ratings
I do not think just comparing current ratings to last week’s tells the whole story right now. Condition ratings have been shown to have a high correlation with final yield late in the season (there is not much correlation early in the growing season). Right now, 62% of the corn crop is rated good/excellent compared to 72% last year and USDA is projecting a national yield 4% higher than last year. Soybeans were 62% good/excellent this year vs 73% last year (12% crop rated poor/very poor compared to only 6% last year) and USDA is still projecting a higher yield than last year.
We will get USDA’s first yield adjustment next Thursday Aug 12th. They are going to adjust it using satellite data, not field surveys. FC Stone came out with their farmer survey yield estimates this week and put corn at 176.9 (USDA @ 179.5) and beans at 50.0 (USDA @ 50.8). That small of a reduction in yield takes carryout down 220 mln bushels in corn from 1.432 bln bu to 1.212 bln. In beans, carryout drops 73 mln bu from 155 mln to 82 mln which is basically pipeline supply (basically out of beans). Informa came out with their estimates on Thursday and put corn at 176.5 and beans at 51.5. Reuters estimate will be out late Friday. The Pro Farmer tour will be Aug 16th through 19th and will be watched especially close this year.
I am starting to feel like we may see a similar pattern as last year where we spend all fall debating the size of the crop without a clear understanding until late winter. The weather market will start to be less of the headline and debates about crop size will take over. As these yields get trimmed, it will shift focus back to demand as well. The markets are a bit nervous with Covid case numbers going up. But each surge we have been through in this pandemic has caused a little less economic damage than the one before it (as long as the politicians do not do something crazy or radical or both) so hopefully this one fits the same pattern.
There was confirmed cases of African Swine Fever (ASF) in the Dominican Republic this week. I think ASF is probably the biggest known downside threat to this market right now. There was a very quick response by authorities but if it flares back up significantly in China or gets into the US, it will really change the demand picture.
There was a big export sale of beans announced Thursday to an unknown destination which is assumed to be China and a sale to China on Friday. If China comes back to the market this time of year, it will really help support.
What To Do
The window is closing on the weather market. We did not have a perfect growing season to make a record crop or an absolute disaster to kill the crop (yet). As we find ourselves so many times, we are stuck somewhere in the middle with more unknowns than we expected to have at this point. That is why the market has been so range bound over the last few weeks. It cannot get a sense yet of what needs to be done. USDA next week, private yield estimates, and Profarmer tour could all help break the market out of the range. I think the biggest downside threats right now are outside market forces, eg African Swine Fever or Covid shutdowns.
Right now everyone needs to be looking at cashflow and space needs for harvest. We need to start planning for the possibility we do not get the weather rally we were hoping for. I think there is still upside potential when we get a firm idea on the size of the crop, but we may not get it until later in the year. I am not saying there is no chance of a big rally in August, I am just adjusting expectations due to the timing now. My personal bias is that the crop is smaller than what the market has priced in but we cannot sit here and do nothing until I am proven right or wrong. That may take until Jan. We need to manage risk as well as cashflow and sometimes that means selling at profitable levels even if we think the market may have upside. We must also recognize that even if we are right about the crop size, the longer we wait the more risk we have of being hit from something unrelated to crop size.
Corn harvest is late in the Southeast and many feed mills are running on fumes. There are going to be early premiums for corn in some markets. As soon as you start cutting, please check with us so we can let you know if there are any big premiums in your area. We have a big corn crop and plenty of demand to use it all but things are going to get tight at harvest. Keep figuring out how much you think you need to move at harvest and if you need to get more sold for glut slot shipment, get the basis locked in.
Be looking close to $6 on corn and $14 for additional sales. If we do not get there in the next few weeks we may need to lower that target. If you feel behind on sales, there is nothing wrong with getting some sales lower than that on an up day.
Wheat
We have been talking about the disaster in spring wheat for weeks now. We have also added floods in Europe and dryness in Russia. The spark this week was talk in Russia of export restrictions. The wheat balance sheet is getting tighter on all classes and most areas of the world. We are at very good levels but we can all remember what wheat can do in a panic. Not only is there thin trade since there are so many different classes of wheat futures contracts but wheat demand is very inelastic meaning if we do need to ration demand it will take more of a move higher to do so.
2022 crop is over $7. If you plan to plant wheat, get some hedges on or orders working for hedges. If you need to move more 2021 crop wheat before corn, get a plan now. Demand is very strong and basis very high in Oct forward, but homes are tight right now.
Cotton
Condition ratings are great in cotton and we have more acres than we expected so cotton has not had the same market setup as the grains. Threats to the world economy also have an oversized impact on cotton when compared to grain. Dry weather in West Texas has been cited as adding to this rally in cotton to finally push through 90 cents. This is in the face of concerns about the economy so I think cotton needs to be sold on this rally. Just as much as I expect a bullish report for the grains next week, I think we could see a bearish tilt for cotton as USDA adjusts yield and maybe harvested acres. Demand is the wild card.
