Weekly Market Update – May 7, 2021

Strong markets have gotten even stronger. Biggest things feeding the bull right now are still no moisture in Brazil on the second crop corn and the dry areas of the US continue to miss rains. The US economy continues to show signs of strengthening on just about all fronts. WE ARE NOT SLOWING DEMAND! The market is now worried about production (mostly Brazil but also starting to be concerned about the US too) and it is trying to slow demand and encourage more acres to be planted. Ethanol margins are getting better and meat producers are making money feeding corn. Soybean crushers are making money so they are not slowing down. Basis continues to improve, even with a much stronger market. That is another sign of a very strong market. Something is going to have to give sometime, but it does not have to happen soon.

Wednesday USDA announced cancellations of corn sales by China and everyone braced for some downside but the market roared higher. That is the sign of a very strong market. One possible reason for the cancellations is that the hog herds are not back up as much as earlier anticipated. Last week, the US attache in China issued a report saying they would not have a significant upturn in hog supplies until the second half of the year. This is partially due to lower slaughter weights as they are getting their hogs to market early as possible to avoid any ASF quarantine. This would help explain rolling some old crop purchases to new crop. Another explanation which is a bit more cynical and conspiracy theory rooted is that they were trying to cancel some purchases to break the market to buy more cheaper. If that was their intent, it did not work. The truth is probably some combination of those two and other reasons.

New crop is starting to really show some life. I think this represents the market’s increasing fear for the US crop. It is very dry and there are very little subsoil moisture reserves. This market has been on a hair trigger and that will only increase as it becomes more and more crucial for the US to make a bumper crop. We need timely rains all growing season long and we are not starting off on the right foot.

USDA’s May Supply and Demand report comes out next Wednesday May 12th at 12 pm eastern time. It will be the first look we get at USDAs new crop carryout. They will not adjust acres and their last acreage number was $2 dollars lower so cannot be relevant. I do not think we have much risk here, but saying that gives me pause. USDA has been known to pull a rabbit. If you have been waiting to do anything, you will not be wrong to sell at these levels before the report.

What To Do
If the Midwest misses a few rains this summer, we are going to see levels we have never seen before in corn and beans. I am not going to print them but use your imagination. If we get timely rains all summer long, we will see the highs before the end of June. It is all going to depend on the summer weather and only time will reveal that. I had been targeting $6 corn and $14 beans and we blew through those levels without slowing down. I do not think we need to be in a hurry here. You are not wrong to make sales at these levels, no matter what happens. I would not be getting over 25% priced. Corn is winning the acreage battle and soybeans are probably one of the losers. With prices as high as they are I am concerned about a bearish surprise on the June 30th acreage report.

I will be encouraging more sales as we approach the end of June. The crop is going in the ground fast. If we have a bearish surprise on the acreage report and then good weather the rest of the year, we may have the highs behind us before we know it. If we get a bearish acreage number and then the rain shuts off it is back off to the races. I would be looking to buy calls against sold bushels on any big bearish event. That will let you participate later in the season if the rain stops.

Wheat is a follower for the most part. Dryness is a growing concern in the US and Canada right now for both spring and winter wheat. Wheat is going to be a feed crop in the Southeast. We can get close to $8 for feed wheat. The corn wheat spread has come in, you can roll any wheat hedges to corn and ship into the feed channel. This means if you have good quality wheat and want to roll the dice, the flour millers should be paying big premiums into the fall this year. All the wheat can get gone very quickly into the feed channel.

I am being patient on pricing more wheat but would be watching the corn wheat spread and if we get close(r) to even money, I would be rolling wheat hedges to corn and selling wheat into the feed channel. There should be money to be made for those who want to hold wheat into the fall since everyone else is going to be taking the easy money and shipping at harvest to the feed channel.

Cotton continues to lag the other commodities. That can only last so long as we are losing acres everyday. Macro economic forces look strong and the world minus India seems to be going in the right direction. Cotton needs to try to catch up. Be patient on cotton.