Weekly Market Update – August 28, 2020

I feel like I have whiplash from these markets and I imagine many of you feel the same way. Let me recap where we came from so we can remember how the tide turned so quickly. Crops were planted early in the midwest with a full profile of moisture. So many areas of the corn belt can hold a tremendous amount of moisture in the soil that they do not need much rain if they start off with a full profile. Temperatures remained reasonable through pollination. There was some heat but not extreme. Each week saw more rain in the forecast. The system that became the derecho was forecast to drop enough rain on most of the corn belt to finish the crop strong. Subsoil moisture had been used up but the crop was about to get one big drink of water and then it would be made. The system moved through so fast that it did not have time to drop much rain. Instead of being a crop saving system, it was a destructive system. The icing on the cake was that it was immediately followed by the most intense heat they have seen all summer. There is a significant cooldown forecast next week that also brings a couple inches of rain. However, the models do not agree with each other on the amount of rain expected. The hurricane is expected to make a hard right and not provide much relief.

Pro Farmer had Iowa at 180, USDA had them at 202. Think both were right at the time they estimated. The crop conditions deteriorated that much that fast. They had subsoil moisture until they didn’t. Heat accelerated the decline. If the plant dies at dent, 40% of yield can be lost. Only 49% of Iowa corn was at dent this week. Last week, there were states that improved to offset the decline in Iowa, but not this week. This week only ND and KY held steady while the rest of the country declined. Mondays condition ratings should show a major decline in conditions across much of the country. They only needed one more good soaking rain to finish the crop and they got a dry hurricane and a blast furnace instead.

We need to maintain some perspective. Earlier in the year USDA was projecting a 3+ billion bushel carryout which shattered previous records. We trimmed acres and we are trimming yield. USDA’s last estimate was 2.7 billion. Lowering yield prospects could get us closer to 2 billion. We have challenges on the demand side of the balance sheet we have to overcome. Ethanol demand recovery seems to be slowing as the summer driving season comes to a close and the world economy remains in some degree of lockdown. China is buying corn from us but (for right now) seems to be displacing other normal buyers rather than adding to the total amount we are going to export.

If you need to sell more corn at harvest, I strongly encourage you to scale in some more sales or at very least buy some puts! We all want to wait and see how low the yield will get and how much damage has been done in Iowa but the fact is that a lot of times the uncertainty is more beneficial than the actual event itself. The market doesn’t know how much yield is lost yet and the funds are buying back their short positions right now because the uncertainty concerns them. If the yield loss is less or the demand is less than what the market has priced in, there will not be time to get sales in before the market drops. It will not wait on us to make up our mind. It is also possible that the loss is more than what is priced in and the board needs to rally more to price that in. I am not saying this is the top of the market, but I want to manage risk. The weather gave us a $0.20 gift, we need to take some of it. You do not have to sell your whole crop, but do some.

Soybean G/E conditions fell 3% to 69% compared to 55% last year. Iowa soybean conditions dropped 6% and South Dakota was down 10%. Beans will not be as quick to shut down and die like corn, but they have still suffered significantly with the heat this week. There is still time to salvage some beans if the rains come that are forecasted but as the week has progressed the models have taken rain away from Iowa and Northern Illinois. We will look for another significant drop in condition ratings this Monday. Much like corn, they only needed one more good soaking rain to finish the crop and not only did they miss the rain but they also had the hottest week of the year.

South American weather is also starting to be important. They have to wait until after the rainy season to plant beans and September is forecast to be dry delaying their planting. A late crop means more time China is forced to buy from us no matter what the political climate. A late bean crop also means less corn can be planted behind the bean crop. Brazil actually dropped import duties on corn and beans. They have exported so much to China that they are actually going to have to import now to satisfy their domestic demand.

Both American and Chinese press are reporting that negotiators had a very productive phone call about Phase 1 progress. This is a complete opposite of only two weeks ago when Trump was saying he did not see any more trade talks happening.

You need to keep scaling in sales! Beans have given us a gift that looked impossible not that long ago. Are we at the top?? If it does not rain in South America we have a lot higher to go but we need to manage risk not try to hit the top. Sell small and sell often! If it starts raining in South America and the yield isn’t hurt as bad in the US it could quickly turn the other way too. There is no way to know with certainty what the weather is going to do in the long term. The models are just models. Sell beans, manage risk!

Wheat has been mostly a follower of corn but a sharp drop in the US dollar has also helped support. The Chinese have bought massive amounts of corn, beans and milo from us. Seems like the market is expecting sales of wheat to show up too. That will give the market a huge boost. Argentina and Australia are also trending more dry.

New crop July wheat is currently trading $5.60+. I think everyone should have orders working above $5.50 up to $6 to get new crop wheat hedged!

The early reports from the hurricane are not as bad as feared so the market is giving back some of the risk premium. Despite all the weather challenges we have had, we still have a big US crop and a lot of unknowns on demand. Exports have started to pick up some which is a positive sign but we have a lot of ground to make up. Cotton hit resistance at high 65 cents and has given back some from the highs.

Cotton is below government support but there is probably still some risk premium left in the market from the storm. Getting some hedges on above 65 cents may not be a bad trade.

Precip for last 14 Days

7 Day forecasted Precip

Long Term Outlook Maps