Weekly Update – October 19, 2018

Corn continued to find strength early in the week coming off USDA’s friendly report as well as harvest delays and strength in soybeans. The balance of the week has seen corn trade sideways drifting lower. Weather looks clear for the near term and harvest activity is ramping up. Also weighing on the market were poor exports this week and also poor weekly ethanol production number. Negative news about demand is not what we need as we know there is a big crop coming. The domestic and world balance sheets are forecast to continue to get tighter but have to keep the demand. Since we are not exporting many beans right now we need to be exporting corn. Basis has firmed in most markets but with harvest finally picking up steam it may remain flat for near term. We do expect basis to get better into the first of the year once the crop is put away. Forecast calls for some rain moving in in the 7 to 10 day window. It is not typical to have a weather market this late in the year, but if we turn back to a wet pattern, the market is going to take note. Brazilian plantings are slightly above the five year average but nothing market moving down there at this time.

Old crop corn is still at 2 month highs and new crop corn is still above $4. As long as we do not continue to see negatives on demand, corn should continue to slowly work higher. Market is anticipating USDA trimming yield slightly on each subsequent report this fall and will be watching closely for yield reports from the fields as harvest progresses.

USDA report was not particularly bullish, but the main feature was that it was not really bearish as the market had anticipated. Soybeans also got a big boost Monday from news that China was taking a couple cargoes of US soybeans and continued delayed harvest as well as from a big move higher in meal. Soybean field losses are estimated by one prominent analyst at near 28 million bushels from wet snow and winds in the western Midwest. Later in the week the news that the US cargoes going to China were purchased before the tariff was seen as a negative but still shows how the market will react to any perceived progress to trade relations. Weather looks more open nearby to make some progress on harvest and producer selling has been widely seen. Exports were well below expectations this week.

The biggest negative on the soybean market right now is trade, but also now taking a close second is the Chinese economy. The volatility in the US stock market subsided early in the week but last night the Chinese indices finished significantly lower and in turn sparked some additional fears in our economy. We are playing a game of chicken on trade. Chicken works out great for the winner but it is very possible that both sides can lose, and lose big. We seem to have the upper hand as it is doubtful that the Chinese can easily replace their demand for US soybeans but the trade war is having negative effects on their economy. If their economy slows down too much and pulls the world into a recession all sides of this trade war will lose. This is why the market is watching their economic indicators so closely and why it weighs so hard on soybeans.

Wheat has been slow and steady in the face of the volatility in corn and beans. It has not been pushed as hard lower, but also didn’t rally as much off USDA reports. The weather in the US has not been helpful to winter wheat seeding anywhere. Exports reported this week were steady compared to last week and within expectations. Brazil’s wheat harvest will be slowed by rain causing quality concerns and Russia’s planting is slow due to too much dryness. Russia’s exports do not seem to be slowing down yet. Wheat has hints of problems just about everywhere in the world right now, but none of them are enough to cause a short covering spark. A problem taking the headlines anywhere in the world will give us a spark. Be patient on wheat.

Cotton’s almost complete lack of a reaction to either Hurricane Florence or Hurricane Michael have been very surprising to many. It tells us that the market right now is completely focused on the demand side. Continued trade tensions erode export prospects and the recently concerning economic indicators in China mentioned in the soybean section add to bearish tone. Hurricane Michael was devastating to big portions of Georgia, there are also some significant losses in Texas due to late season rains and snows, poor conditions in key growing areas of India and snow in cotton producing regions in China. Market clearly sees more risk in the demand being lost due to trade tensions and concerns about Chinese economy than the supply lost with these weather events.

All the negatives mentioned above, I want to leave with something positive. We may be in a situation of increasing bean stocks but we also have increasing demand. No matter how much they talk about it, China cannot just snap their fingers and replace beans/meal.