This week has given us more excitement in the market than we have grown accustomed to, and not in a good way. Markets were not open Monday but sold off hard Tuesday and Wednesday. The tough thing about trading any market is that you do not know where the high is until it is gone and you do not know how deep a correction will be until it is too late. Markets need corrections during rallies to satisfy the technical signals that so many participants live by. When a correction happens, there is no way to tell for certain if the rally is over and the highs are in or if it is just a temporary setback on the way higher.
No matter how strong your constitution and now matter how many dollars we have gained over the last three months, a drop of 80 cents has a way of getting everyone’s attention. For anyone who sold some grain during the dip this week, you did not make a mistake. You sold at profitable levels. We are at levels we did not dream were possible not that long ago. No matter where we go from here, $14 beans and $6 corn are not bad sales. You locked in profit.
I enjoy a demand rally much more than a supply rally. Supply rallies are generally much shorter. Like 30 to 60 days. The planting rally in 2019 springs to mind first. It was too wet to get the crop planted and the market reacted until the crop got planted and then fell apart. This rally is different. We have more demand in China as they build back their hog herds. On top of that we have had production issues in China, South America and the US over the last growing season. We estimate that China’s hog herds are back to about 88% of pre-swine fever levels. They just approved more GMO varieties for import. Corn has been over $10/bushel in China for months now. It doesn’t matter who is in the White House, China needs ag commodities and the US has the only corn and beans available in the world right now. Ukraine is hinting at an export tax on corn that may be announced as soon as this weekend. Argentina banned exports, then reversed that decision and went with an export tax but now there are more port and trucker strikes preventing much from being exported right now.
Brazil has started their early crop harvest now which is a little later than normal. February for them is like our August for the bulk of the crop. The bulk of analysts (including USDA) have not reduced the South American crop very much yet. There is still a lot to be figured out on that front. Looking at weather across a whole continent is not very easy to summarize. We are much more familiar with the US and it is difficult to accurately summarize the weather across the entire continent to describe how much yield potential we have in our corn and bean crops during the growing season. It is the same when trying to describe South America. Rain has been falling in both Brazil and Argentina and that has added to the downside pressure due to the adage rain makes grain. Generally, they cannot hold as much moisture in the soils as we can in the black soils of our grain belt so they need to keep getting the rains. There are still lots of questions that cannot be answered yet about the size of the South American crops. The crops are far from in the bin yet.
As I said earlier, you cannot be sure of when the highs are printed until it is way too late to sell them. Any big correction should get everyone’s attention. With all that we know about demand and supply right now, it looks like the market still has a lot of work to do in rationing demand and encouraging more production for next year. I would put very low odds right now that the highs are behind us, especially in the new crop contracts. We need more acres in the US to be planted and the market has to encourage that to happen.
Even with some rain falling in South America, we still have a lot of fundamental factors that are going our way. Fundamental factors are not the only thing that drive markets and we need to be watching carefully for threats outside of supply and demand. Covid cases rising in China is something that is concerning. The Chinese economy has been the engine for growth for the rest of the world. If they have to enact widespread shutdowns to slow the spread then it is going to cause some panic in all the markets. Fundamentally that would not change food consumption or demand so on the surface you would not expect it to change prices dramatically, but perception and fear sometimes outweigh logic. A Chinese shutdown would cause some degree of panic and could put downward pressure on prices. In addition to the new demand and less supply, we have benefited from money flow into commodities and if that tide turns, it would be detrimental to prices.
What To Do
Any sales you made this week or are planning to make are not wrong no matter what happens. $14 beans and $6+ corn are fantastic levels. I am discouraging panic sales of the rest of the crop but not discouraging small sales. If you are going to need cash soon, sell a little. Hopefully this correction will not last long but it may. Long term, I still think we have a lot going for us. New crop has a lot of work to do. Orders at $12 beans and $4.75 corn are not wrong. We can afford to wait for the long term in new crop, but if you need cash soon you may not be able to wait long enough to be right. Levels are good for small sales.
Wheat
Wheat has just now gotten a few chances to lead. Since wheat had the most comfortable supply and demand it has not gotten the speculator attention that corn and beans have. The very dry cold conditions in the Midwest and Russia’s export controls to rein in food inflation have made wheat more attractive to speculative money flow. Soft wheat (the Chicago price) does not have as much concern as Kansas city and Minneapolis wheat. Kansas City and Minneapolis have been gaining ground on Chicago. There is probably more upside in the other contracts than Chicago, but it will follow to some degree. We are not the only wheat in the world right now like we are in corn and beans. Wheat has finally gotten some upside potential but it is not as concrete as corn and beans look. I would still encourage hedges on new crop up to 25 or 30% of expected production above $6 on july.
Cotton
Cotton has found strength on the global stock market’s continued uptrend. Cotton should be the most sensitive to a Chinese slowdown, so it does not appear to be priced in right now. The market is also boosted by prospects for more stimulus from congress that will exert an inflationary force on commodities. I am still recommending sales above $0.80 on old crop and nothing on new crop yet.
