Weekly Market Update – December 31, 2020

Even with all the volatility we have had over the last six months, a 40 cent move in beans is rare, up or down. What is even more rare is a 40 cent move without a clear cause. Usually when we see a move like that, we can point to one or two major contributing factors or headlines from that day. I had many calls this week when beans were up 40 from excited people asking what the news was that caused beans to rally that much. I cannot point to one headline. We have more bullish currents flowing now than we have in many years, but there was not just one thing on Tuesday that gave us that big rally.

The market has to ration demand. That is something that the market has not had to do in several years. During the planting rally we had two years ago in the spring, the market was trying to encourage farmers to keep planting even after it got later than when most people normally plant. And they did. This rally is different because we have so many factors that are in our favor now. We have less supply from 2020 US crop. We have less supply from 2019 crop (after USDA’s revisions). We have threats of less supply from the weather in South America. We have huge demand increases from China for corn and beans. We have huge demand from the US for soybeans. We have a weaker US dollar. We have strong fears of inflation. We have very low interest rates so lots of institutional money looking for returns. Corn was a bit late to the party because ethanol makes up 40% of our demand and there are still big questions about ethanol demand. Corn is joining in now. With the weakness in the US dollar, our corn is some of the cheapest in the world. Corn is $10/bu in China!!

Beans blew through $13 without near as much resistance as $12. From a fundamental standpoint, beans have to get to a point where some people do not want to use them anymore. They have to slow domestic and foreign demand. When the dollar gets weaker, that makes beans cheaper to foreign buyers which offsets some of the rationing the market is trying to do. Beans have to slow demand and figure out how many beans are going to be made in South America. The port strike in Argentina is over and the market dismissed it. When the time comes, they are going to also have to encourage acres to be planted in the US too. From a technical standpoint, lots of money is looking for returns and an inflation hedge. Most of the beans were sold off the combine in the Midwest, so there is no natural seller when the funds want to buy. That is why this market has been so explosive.

We all want all the sales back that we made earlier in the year but we covered costs with those sales. Now with some things paid down, we can afford to be more patient. You are not wrong for selling beans over $13, but I would do so only very slowly right now. We have a lot of tailwinds to help this market and I want to pull those averages up as high as we can. I have been advocating sales for new crop at $11 and we are above there now. I still think some small sales can be made there, but I am being more patient on new crop too. This market has not really dealt with the new crop acres yet. When we start looking at acres, corn and cotton cannot afford to give up acres either so we should have lots of competition for acres which will really help new crop contracts.

Until now, corn has been the laggard. Ethanol is 40% of our demand and we still have a lot of questions about ethanol demand. However, Argentina just shut off all corn exports until March because they are out. Ukraine has been cancelling contracts. The US has the only corn available in the world and the dollar is getting weaker. Corn is $10/bushel in China, and has been for 3 months. The market needs to make sure we have corn available so it is beginning to try to ration demand and draw out supply. After our spring (South American fall), there should be corn available in South America when they harvest their new crop but there are lots of questions as to how much. Corn will not be able to give up any US acres so it is going to have to stay competitive with beans. That will help new crop.

I am being patient on corn sales. Look for train delays to sell basis. Scale in on futures but do it very slowly. Get a few bushels on the books for new crop above $4, but be patient on it as well. I have not forgotten that the best sales we made in the last 5 years was in fall/winter a year before but we have a lot of tailwinds here to support. We have a lot of factors in our favor.

Beans and corn have been breaking into new highs but wheat has not kept up. Wheat does not have the same world balance sheet tightness. What wheat does have is the same tailwinds of inflation though. Wheat is also a very political crop in many parts of the world. Russia and other countries that used to be part of the Soviet Union are worried about food inflation and have hinted at additional export controls. When politics get involved, fundamentals can get pushed to the background. The US dollar weakening has helped make US wheat more competitive in the world.

Wheat has a lot of upside due to outside forces but the fundamentals remain a little more questionable. For that reason, I am a little more willing to keep scaling in sales on wheat compared to the other commodities. I am not saying to sell everything, but I am more willing to sell wheat.

Much like the other commodities, we had too much cotton right up until the point we did not. The difference was that with cotton, that point did not happen until a month ago on cotton while it happened late summer for corn and beans. USDA dropping yield and China increasing imports helped pull the balance sheet down. Cotton now finds itself in a position where it cannot afford to give up too many acres. It is behind now and will have to fight to get ground back. Work orders on old crop close to $0.80 and be patient on new crop.

I hope everyone has a happy and safe new year!