Weekly Market Update – July 5, 2019

The trading days since the USDA grain stocks and planted acreage have continued to be very volatile. Many have been reporting the lack of clarity provided by this report in comparison to a normal year when planting is all but done when the surveys are conducted. USDA continues to acknowledge the uncertainty that remains about planted acreage by announcing an unprecedented resurvey in the corn belt which will be reported on the August crop report. The difficulty the market is having in interpreting the report is that some prevent plant acres were included in the acreage total but some were not and we have no accurate way to estimate how many were and how many were not. The actual survey sent out did not account for prevent planted acres explicitly because the survey was designed well before anyone knew this would be an issue of this magnitude. USDA had to report the data the survey compiled, and the market reacted to the large acreage number before there was time to digest and understand what implications it had. We know there are major issues across the entire corn belt and it will take a lot of time for us even determine how much was planted much less the yield potential the late planted crop has, however a supply rally needs to be continuously fed and this break in prices scared a lot of nervous longs enough to panic. We have seen a big increase in open interest this week as well, indicating a lot of end users who know how bad this could be, getting coverage on. We were almost to the point ethanol plants were about to shut down and ration some demand but that was quickly reversed with the break in prices. It is possible that this break will make the rationing process harder later in the fall and make prices go higher to accomplish it. With the acreage uncertainty and the fact we have no clue what the yield potential is on a crop we have never planted this late, the market still has a lot of questions to answer. Everyone was looking for condition ratings to improve as the warm wet weather should get the crop growing now but improvement in the Western Belt was offset by a decline in the Eastern belt. Condition ratings do not account for lateness of the crop and there was still a great deal of the crop that has not emerged on the planting progress.

In an interview Wednesday, a USDA undersecretary hinted there could be 10 million acres or more of prevented plant acres. We have USDA’s July supply and demand estimates coming out on July 11th (next Thursday) which could be another wildcard. The supply and demand estimates are compiled by a different branch of USDA than the acreage and stocks reports, but they will use the 91.7 million acres as a starting place. The biggest question is how they are going to adjust it for prevent plant acres.

Use these pullbacks to buy calls. Basis is going to be near record strong as the eastern corn belt is the hardest hit area. After running most of the year without a rail hiccup, old crop basis has traded as high as $2+ on a rail delay. Do not be in a hurry to lock in basis for new crop, we can hedge at any time. Having the board protected but not basis leaves you the flexibility to shop basis when they need the corn.

It was clear this week that the market was not trading just USDA report numbers as the acreage and stock report was fairly friendly to soybeans but yet soybeans have struggled all this week. The benign weather in the Midwest aiding planting and crop development has contributed to weakness. There finally seems to be progress made on trade, but the market wants to see actual purchases made before reacting. They will not believe Trump’s announcements until they are followed by purchases. Earlier in the year, we believed it would take huge soybean purchases by China or several years to work through the excess bean stocks. The late planting has provided enough production uncertainty that there is a chance we can dwindle down these stocks without record purchases, but it would still be very helpful to have them in the market. Due to their animal losses caused by swine fever, they will not need as much as in previous years. On a rally back close to $9.50, we need to put new crop sales on.

Wheat has followed corn down as the seasonals also add pressure. Kansas crop yields are coming in high as expected. US missed some recent export business. As corn rallies back, it will take wheat with it due to increased wheat feeding levels taking care of excess hard wheat stocks in the west. Soft wheat is going to be extremely hard to come by. In recent memory, $1.30 has been about the top in wheat basis due to rail replacement values. This year with the Ohio and Indiana crop being small even before the rain started, the upside on basis will be quite a bit higher. All the flour mills have been lowering their minimum specs and raising basis to try to get enough.  

Cotton has been the only bright spot for most of the week. Funds have been building a sizeable short position in cotton until this week and have been liquidating. Acreage estimates were a bit below expectations but not by a huge margin. We still need a deal with China to help the cotton balance sheet and the recent progress is very welcome. Condition ratings were higher than expected as anecdotally there seem to be some very poor looking areas in parts of the cotton belt.