Weekly Market Update – December 17, 2021

We are not going to get much US data for the next few weeks until the Jan 12th USDA supply and demand report. The market expectations from the December report will probably be carried over with the market looking for a slightly smaller corn carryout due to increased ethanol usage and slightly higher soybeans carryout due to slow exports. The Jan report can offer some big surprises, but until then I look for the market to be trading mostly on three things:
1. South American Weather
2. Foreign markets
3. Money Flow

South American Weather
We have been talking about La Nina for a year and a half now. La Nina typically happens over two years in a row and they had a strong one last year and all indicators were that it would happen again. However they got off to a great growing season so the market has priced in bigger crops. Now the weather forecasts for Southern Brazil and Northern Argentina are becoming a little more threatening and the market is reacting. We are trading in a traditional weather market mostly in beans. Earlier in the week when rain was falling in the dry area, the markets showed a lot of weakness. Now after those rains are behind us and the forecast looks drier, the markets are finding support. Many expected USDA to raise South American production estimates as some private and the Brazilian government did but USDA left them unchanged. With the weather turning adverse, I believe we have seen the high in South American production estimates and will begin to build a weather premium in the markets.

Foreign Markets
China has not been buying as much from us as we had expected and the window is narrowing when we have the advantage over South America. The Chinese also seem to be buying corn from the Ukraine at what some think are higher prices than offered in the US. One theory as to why they are buying higher priced corn from Ukraine is that they do not have to publicly report these sales as they do in the US. Mexico had made a lot of noise about only buying non gmo corn from the US but then we saw a single purchase from Mexico that was almost the record single tender. Our northern and southern neighbors are aggressively buying corn. Exports were above expectations across the board this week for the first time in a while but we have a lot of ground to make up. Wheat importing countries continue to tender higher levels for wheat and tensions remain between Russia and Ukraine.

Money Flow
There is more money flowing into all asset classes than we have ever seen. We have inflation across the board in all aspects of our lives right now. That is one of the biggest undercurrents in commodities right now. Money flow is a fickle thing though as it can easily go the other direction too. The Federal Reserve has finally acknowledged that the inflation we are facing is not all transitory and will not just go away when supply bottlenecks get resolved. Central banks around the world are also acknowledging this and the Bank of England was the first one this week to actually raise rates. The European Central Bank has announced tapering their bond purchases.

The US Federal Reserve announced this week they are going to move faster to end bond purchases and sees 3 rate increases for next year. All the central banks are walking a very fine line as too much liquidity in the market increases inflation but tightening up too quickly will push the economy into a recession. When news of the new variant first hit, the market seemed to expect widespread shutdowns again. The data out of South Africa now shows cases going up very quickly but hospitalizations are actually going down. This is a very good thing for the markets. An announcement by the Fed of increased tapering and three rate increases next year one would have thought would chase money out of equities and commodities but we have not seen that. The only thing that markets dislike more than monetary tightening is uncertainty and the Fed has done a good job of making intentions clear. Thursday was surprising to see higher closes in almost all asset classes after that announcement. I think the bubble will burst in the sketchier asset classes (like Dogecoin) before we see any fallout in the grains. We have the fundamentals to help support when the money gets a bit flighty.

One negative thing for US commodities is that the US has so far weathered Covid much better than anywhere else in the world. Due to that and the fact we are leading the recovery, the US dollar is strengthening. This makes our exports less competitive and puts pressure on US commodity prices. Luckily there have been other bullish factors to offset this negative pressure.

Corn had a strong run this week but has not been able to break through $6 (May got to $5.995 today). Technically corn is reading a bit overbought and lack of followthrough today is not bullish. But pullbacks should be limited. As we experienced over Thanksgiving, thin holiday markets can get pushed. Basis has strengthened and rail logistics have not improved. If you have not priced any corn in a while, get some old crop sales on around $6. If you have been scaling in sales, work orders above $6 to keep scaling in small. I am still being patient on new crop.

Beans were unable to break back through $13 on Jan or March. Basis is getting stronger at Southeastern processors now that combines are put away. Long harvest truck lines will start to die down too. New crop beans are hanging around $12.50. I think everyone should be making old crop and new crop sales here. If South America loses more of their crop there is a lot more upside in beans, but if the rains come back beans have more downside than corn. ​

Wheat exports were finally well above expectations this week but we need to see more weeks like this to change the trend. The strength in the dollar is hurting US wheat competitiveness. The market is trying to attract more acres but 53% of US wheat production is in a drought. The long term forecasts do not look beneficial for many wheat production areas in the US (see the picture of the dust hurricane in Kansas below). There was some improvement in some areas of the US over the last few weeks. New crop wheat is now 30 cents from $8 level in Chicago but it only takes one hiccup somewhere in the world to get it back there. If you have wheat up and growing, I would be getting some hedged on another move back above $8.

When we saw the limit down moves a few weeks ago, a lot of analysts were predicting a dramatic drop back below 100 but cotton has managed to find support here. Four fifths of China’s cotton production is produced in Western China and there are accusations of forced labor in the Xinjiang region and increased political pressure to ban imports from that region. US senators gave final congressional approval this week for a ban on imports from Xinjiang region unless business can prove the products were produced without forced labor. The implications of this on the cotton market are still a bit uncertain but taking any cotton off the world balance sheet is supportive. I would not be quick to sell remaining old crop below 110 and would be working orders above 90 on new crop.