Sunday night opened with fireworks and not in a good way. News out of China was that a very large real estate company, called Evergrande Group, was about to default on their debt. To give you an idea of scale, Evergrande has 1,300 projects in 280 cities and assets worth $350 billion (and debt of $310 billion). People were comparing the possible insolvency of Evergrande to the failure of Lehman Brothers in 2008 that sent shockwaves through the global economy. In short, people were worried the failure of Evergrande may create contagion in other parts of the economy and the ripple effects could wreak havoc. These fears drove the markets on Monday as everything sold off. Stocks, commodities, energies, everything was on the offer. Chinese markets were closed for the holidays so there was no official information coming and that just added to the fears. As we worked through the rest of the week, it seems that the Chinese government is not going to step in to curb a possible collapse as they have instructed their local governments to prepare and instructed companies to examine their exposure. As everyone took some time to think it all through, the markets seem to have come to the conclusion that their possible failure is not going to take the whole world off into a ditch. Cooler heads have prevailed and brought the markets back almost exactly where we finished last week. This is a quick reminder on how much something completely unrelated to the ag markets can cause large movement. Even when the fundamentals are very bullish, we can still have the rug pulled out from under us. This time it was only very brief, but it is not always so brief.
Next Thursday we will get the USDA quarterly stocks. This will give us grain stocks as of September 1st which will be “final” ending stocks for last year. Many times this report is not a big mover but the last two years USDA has used it to adjust for something they had missed earlier (like lower soybean yield in 2019 or way more corn used for feed in 2020). The range of things USDA can adjust on this report to make the balance sheet work out is large so hard to get a handle on which way it may go. Many analysts believe USDA corn for feed and residual has been too low and will be adjusted and very strong corn basis until the port shut down seems to lend some credence to this. Bean basis was dropping even before the hurricane which may be pointing to an adjustment higher for bean stocks.
Harvest is getting underway in the Midwest and since they are just barely getting started, the yield reports are anecdotal at best. There is nothing worth noting yet as far as yield reports but the market is staying closely tuned. The weather is dry and warm in the Midwest so they will be rolling wide open soon.
In soybeans China is back at the market in a big way but unfortunately they are not buying from us. Last week they cancelled a purchase from the US and replaced it with Brazilian origin that cost them over $15/bushel. This week there are rumors they bought three cargos of Brazilian soybeans. As we are coming into new crop we have the cheapest beans in the world but the slow reopening of export facilities along the Mississippi river and in New Orleans is still causing headaches. The Chinese need beans now and seem to be nervous about how long it will take so are being wary of buying from the US for now. More and more of the export facilities are coming back online so we will catch up, it is just a question of how long it will take. The Chinese need soybeans now and are not taking any risks on delays so they are paying more to buy them from Brazil. Prices for soybeans in China are very close to the all time highs reached March 8th of this year (see chart below). Corn prices in China have dropped quite a bit off the highs as big imports and they appear to have a big domestic crop. Even though corn is at the lowest price in a year, it is still around the equivalent of $9.61/bushel.
The weather models in South America are adding some moisture into the parched areas of Brazil to let them start planting their crop. The rain has not come yet but it is in the forecast now. If they get the rain, they will be able to get the crop planted timely.
What To Do
Corn basis has really collapsed with the weight of the big local crop as expected. No storms have made for a quick harvest so far. We have plenty of demand for corn but cannot handle it all at one time. If you need to move corn before beans, you need to find a basis now, even if you are selling basis cheaper than we are used to. I would also be selling some January bushels now if you can get close to historical basis at one of your local feed mills. A big local crop means there will probably be a lot of bushels looking for a home in January too. Some markets do not have a decent Jan bid yet and i would be selling significantly below historic Jan basis. I would be scaling in sales in the old range of $5.50.
Soybean basis is strong in most markets in the Southeast. There are still early premiums of triple digits at several crush plants. If you are harvesting early beans, be hauling now to get these early premiums and before the lines get long. We need some help from demand or south america weather but beans can get back above $13. To even have a chance at $14, we are going to have to see a big issue in South America or something on demand. The rain at the end of the growing season in the US helped to add some cushion to the balance sheet. We do not know how much yet.
Wheat
Wheat was the leader a few days this week and helped pull corn up. There were rumors of China trying to buy some US wheat which helped support the market. Wheat importers keep having to raise their tender prices to find sellers. Countries know how important keeping a lid on food inflation is to domestic stability so wheat importing countries are trying to make sure they have secured supplies in case Russia or someone else further slows exports to control domestic inflation. There is a big crop in Australia but China has been buying it despite their political differences and fighting has helped illustrate how big demand in China is. More talk this week of Russia raising export taxes and overall commodity inflation risk. Demand seems to be strengthening around the world. If you are growing wheat next year, scale in sales somewhere between $7 and $7.50.
Cotton
Cotton took the biggest hit on monday from the Evergrande headlines. Cotton is more closely correlated with stocks because of how sensitive cotton demand is to economic growth. Therefore it was the biggest loser on Monday but after the Evergrande fears subsided and the Federal Reserve comments from this week were interpreted as bullish for the US economy cotton was able to gain all the losses back and more. 350 point move higher to finish the week seems excessive to me but some technical levels were hit giving the cotton charts a bullish picture. There were a couple huge trades on Friday that helped propel the market. Exports were good this week as well.
I think everyone needs to be selling 2021 cotton above 95 cents. Technical traders point to how bullish the charts are now and technicals can rule in cotton longer than they can in the higher volume grains, but we have too good of a crop in the US for me to be that bullish.
