We have finally seen some life in the markets in the right direction as corn posted its biggest jump in over a month. I caution everyone that I see this as a selling opportunity, not a shift to a sustained rally. If you have old crop corn to clean up, you need to be selling any up days like we had this week! Scale in sales, you do not have to sell it all but do some.
There were a couple positive things cited as reasons for yesterday’s rally. One that I am a bit skeptical of is the hot and dry forecast for the midwest. As wet as they have been, a period of dry heat will probably do the crop some good as long as it does not last too long. If the hot dry period were to stay longer, then it may start to do some damage. As in any weather market, the changes in longer term forecasts are more important than the current weather that has been priced in. The changes in each new model run are priced in quickly once they come out. The funds have built a very large short position in corn, so the changes in weather forecasts may have been enough to spark some short covering even if the long term effects of the hot/dry will have limited impact on the final yield at this stage. Another reason for short covering was increasing ethanol production. We have a huge hole to dig out of but the market was reacting to some steps in the right direction. Gasoline consumption has leveled off the last two weeks after regaining almost half of the deficit quickly before the lockdowns were rescinded (see chart below). The market is waiting to see if the leveling off is the new normal or if we will resume the recovery quickly. I believe recovery in old crop demand with ethanol had more of a hand in the rally yesterday than weather since the old crop was up higher than the new. If this weather pattern continues all the way through the end of June and the forecasts for July remain hot and dry, then we will have a weather story. Right now, old crop needs to be sold on this rally.
The other narrative that continues to weigh on the market is US/Chinese relations. China passed laws taking away Hong Kong’s autonomy and other countries had told them there would be consequences for doing this. Now we will see what the reaction will be. China has continued to buy the bulk of their usage from South America and just a cargo here or there from the US. Their imports have been just to keep up with usage, there have been no signs of building back state reserves which many had expected if China were to try to fulfill the terms of the Phase 1 agreement. Brazil continues to refuse any coordinated attempt to slow the spread of the virus at the national level and their cases are rising exponentially. At the pace China is importing, a logistical hiccup at the port would really change the narrative. There was one case at the port, but that has not spread enough to effect operations yet. China bought beans from Brazil for October which is when they usually start buying from us. That was seen as a negative indicator for China fulfilling the trade deal. It would force their hand if things deteriorated in Brazil and they had to buy from us, but if that doesn’t happen we seem to be hurting our chances of them fulfilling the deal. The US trade representative will be evaluating their compliance and reporting in mid june.
You need to scale in sales of old crop with the bounce we had this week! You do not have to sell it all, but sell some. If you are wrong, you have lots of new crop that will gain in value. Get orders working on new crop $3.40-$3.50. Get some sales on and hope that is the cheapest we sell. We have a long growing season and a lot can change, but we need to be offsetting some risk with the market gives us a gift even if its a small gift.
Beans have better fundamentals than corn AS LONG AS relations with China do not melt down. A meltdown feels closer than it felt a few months ago. That puts more downside risk on beans. I think that means we should lower our expectations for old crop. I would be looking to sell any move about $8.50. Basis remains very strong. I think we can still be more patient on new crop with $8.70-$8.80 reasonable targets.
Wheat got a spark from corn and has taken the mantle today. Wheat harvest is beginning in Texas and Kansas. Chicago wheat has the best chance but we have lost the time that we had on our side. The seasonals for wheat are not as friendly as we move through June and approach July. The weather in Russia offered enough rain to take our rally and the strength in the US dollar compared to the Russian ruble did not help matters. We need to lower our objectives. I am more aggressive as we approach $5.50. A move toward $6 seems unlikely for now.
Flour demand is still strong in our market and with all the rain we really don’t know what to expect as far as quality. When you start cutting, start testing! Keep quality separate and we will have good homes at a premium!!
Cotton had started to build some momentum as economic activity was starting to pick up. The renewed tensions with China have wiped out a lot of those gains. Weather has been bullish for cotton, but it has been unable to shake the trade tensions. Nothing to do on cotton.