Weekly Market Update – May 22, 2020

Markets are back to trading narrow ranges. The old adage that you do not sell corn in a sleepy market comes to mind, but I do not think we can count on old sayings to help us market with all that is going on. I am still very concerned about what demand will be left standing when we harvest in the fall and the market is too.

On the Chinese front, we have two competing themes. On the bullish side, we have had many assurances from both the US side and the Chinese side that they fully intend to reach their Phase 1 objectives. On the other side, their government just passed tough new laws against Hong Kong in the name of ‘National Security.’ This is what started the original protests over a year ago. The US has previously warned China not to pass laws like this but have not stated what the response will be. The US is threatening additional action against Huawei, the Chinese telecom giant. The market is trying to figure out how to interpret all these developments but the overwhelming feeling is that we are moving further away from cooperation and getting closer to reigniting open conflict. China is exporting all they can from South America but will have sucked them dry soon. Brazil is also looking increasingly unstable. A pessimistic view of it all is that China is only playing along with us as long as they can to see how things shake out in South America to see how bad they need us. The optimistic view is that economies start to open back up and grow. People get back to work and that helps the tensions recede.

USDA is still trying to get staff trained and rules interpreted for employees for the CFAP payment. What you need to do to prepare is get your total 2019 production and inventory on farm as of Jan 15th. You will be self certifying these two amounts and USDA has not stated yet how they will verify or audit. The thing that scares me most about this program is that it will all be self certified AND the rules are ambiguous (right now). That is a very bad combination for those trying to do the right thing. I hope we get firm clarification from USDA, but right now we have not. One thing that is unclear right now is how basis contracts will be counted. Start getting your figures together now while it is too wet to do much else.

Weather has been cold and too wet in much of the Midwest. Some areas were able to get planted very early, but have not accumulated the GDUs to get the crop going. This slow growth may have saved some replants from the unseasonably cold weather. There will be some prevent plant in the Midwest with this wet weather. Last year, much of the crop was planted late and in less than perfect conditions due to the movement in the board. This year with the markets trading flat with no excitement and a better understanding of prevent plant payments, I do not think we will see the push to get it all planted no matter the conditions or calendar. I do not think we can get enough acres out of production to drastically change the balance sheet, but every bit helps.

On the positive side, implied gas demand has recovered about half of what we had lost due to the shutdowns (see chart below). It seems to have leveled off last week despite the reopenings, but it will be closely watched to see how that changes further as more is reopened. We have a big hole to dig out of, but it is positive to see it going in the right direction. Cars use more ethanol than any mass transit and we look for mass transit to be last to recover. The crop in the Midwest is not getting the GDU’s it needs and some acres are going to take prevent plant rather than plant. However, we should not over play our hand here. The market is going to put in a risk premium for the uncertainty of production and we need to be sellers! We cannot not be too patient because it is still a long shot that we will be able to recover enough demand by this fall. We need to protect ourselves. I want to have old crop cleaned up and a good bit of new crop protected before the end of June! Scale in sales on bounces in old crop: $3.25, $3.30. Sales in new crop at $3.40, $3.45, $3.50 December.

Soybeans started a strong run that fell apart with the increased tension with China. Fundamentally beans have a better picture than corn AS LONG AS we still have some kind of cooperation with China. The threat to soybeans is that relationship completely falling apart and going back to trading lows. Basis remains strong in the Southeast with good exports. Look for $8.60 old crop and close to $9 on new crop. I think we can be more patient on beans than corn. The downside risk in beans comes more from trade than getting domestic demand back like corn.

All this rain in the Southeast has not been good for wheat. Thankfully we are not the only ones facing adverse weather. Due to the virus lockdowns we are not seeing the normal wheat tours, but the virtual crop tours are finding freeze damage and a smaller crop than USDA has been estimating. The weakness in wheat has been in part due to the condition ratings not dropping to reflect freeze or wet weather damage. The crop tours seem to be indicating that we have not seen the full picture yet. We also got a huge boost in wheat this week due to rumors of the Russians limiting exports of new crop. The weather models in much of Europe and the Black Sea have turned back, trending dryer. The dryness has not been at the forefront in a while due to cooler temps. Now things look a little dryer and warmer.

There is a huge advantage of milling wheat above feed wheat this year. Make sure you do everything you can to preserve quality and separate lighter wheat from heavier! Milling wheat basis has weakened during harvest but is still very strong into the fall. We need to lower our range on wheat now as harvest approaches, but we should still see a run toward $5.50 on the board.

Cotton started finding some strength before the fears about China were reignited. That has been the main talking trading points on cotton for over a year now and we cannot seem to get any consistently good news on that front for any length of time. The cool wet weather in the Southeast has not been friendly for cotton production or acres. That should help cotton long term.


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