News has been very quiet on the grain front this week. Exports were slow but that is expected this time of year. Ethanol margins are starting to tighten as old crop basis has increased due to lack of supplies of old crop. Another frost hit late second crop corn in Brazil this week which will further reduce that crop. They have already started buying corn from Argentina. Most export contracts from Brazil and Argentina have buyout clauses and we understand those are being exercised as their domestic supplies are extremely tight making it more profitable to buy out and resell domestically. Any bushels that remain domestically will have to be replaced on the export market with the US being the likely beneficiary. China has had some historic floods in crop producing areas and we suspect their domestic stockpiles are very low. However grain prices have stabilized and have trended lower within the country and they have been quiet this week with no big purchases announced.
Crop conditions were stable overall for corn and slightly better for soybeans but both significantly behind last year. Looking across each state, we saw the same pattern as last week where conditions improved in the parched western belt where they got some moisture, but declined in the east where they have had too much rain. To have a chance of a trend yield, we are going to have to have near perfect crops in the east to offset the drought crops of the west. The long term forecast does not give much chance for much needed showers in the west. There will be some thunderstorms and some will have severe weather, but not the widespread soakers that are needed. The corn had moisture to get pollinated from the last few systems, but it has to continue to get rain. Remember last year, the rain did not shut off until late July/Aug.
There was not much new fundamental news this week but a few interesting things happened in the market that are worth discussing. On Monday we had a near meltdown of the outside markets. The Dow was down almost 1000 points. Crude oil was down close to $6/barrel which is almost a record one day move. Industrial metals were all down sharply. Rising COVID cases around the world spooked the market which started questioning the economic recovery. The market is trying to figure how much inflation we are going to have and how the Fed is going to deal with it. The market has not priced in much risk for lockdowns in other parts of the world if cases continue to rise. As the outside markets melted down, they took grains with them. Corn and wheat were able to hold on better than soybeans. I do not think there was any changes in supply and demand fundamentals specific to grains on Monday, it was all outside forces and fund money. Monday’s trade should serve as a reminder that even if the fundamentals in grain stay very bullish, something completely unrelated to agriculture could knock these markets. Even if we could be sure the yield was coming down and price should go up, we should always be eyeing scaling in sales at profitable levels to protect from something in the outside markets.
Tuesday and Wednesday were both notable for lack of volume. When the news wires are quiet, the market is also very quiet. Lack of liquidity makes the market more volatile. When news does hit, the volume comes back quickly but there is going to be extra volatility. This leads me into the discussion of Thursday where the meltdown came from within the grains not from outside markets. There is not one thing I can point to to explain the selloff Thursday morning. The models are still showing very dry for the long term forecasts but there is not much confidence in them. There are some thunderstorm activity forecast so local areas could get rain, but there does not seem to be widespread soakers moving into the model runs. I think we are seeing the effects of thin volume. Spring wheat has sold off this week despite an absolute disaster of a crop. Condition ratings are at near record lows but that is a very thinly traded market compared to the other ag futures markets and the funds have a large position so the volatility is going to be significantly more. Even with normal volumes there are moves we cannot fully explain and that is more so in thin markets with no news. I think Thursday was an example of that.
What To Do
As long as condition ratings do not improve, the thought is the crop is getting smaller. A lot of analysts think demand has room to move up and supply has room to come down. If the last few years are our guide, USDA is going to be very slow to make those adjustments. Last year they did not make the last yield adjustment until January. In a normal crop year we usually have a guess on the size of the crop by now. In some short crop years that burned up before pollination, we put the highs in late july early august. This year there are going to be a lot of unknowns about the crop for a while still. Weather is still the most important thing right now. There is still a lot of uncertainty for this late in the growing season. Uncertainty in the growing season is bullish on the board. However as i mentioned earlier, it’s not what we are watching that is the most risk to our markets. It is what we do not see. You need to be getting a plan for your harvest corn bushels. Harvest bean basis is at historic highs so I would encourage basis sales. Early bean premiums have upside still. Even with all the reasons the board should go up, our crop is getting bigger so I encourage scaling in sales and working orders on corn and to a lesser degree on beans.
Wheat helped hold corn together on Monday but could not do the same on Thursday. I cannot say it enough, spring wheat is an absolute disaster. However Minneapolis wheat (the spring wheat futures contract) has been selling off hard this week. That is a very thinly traded futures contract and the funds had build a very large position so it seems to be mostly positioning rather than telling us something about the fundamentals. I think that contributed to the weakness in Chicago wheat on Thursday.
If you are going to grow wheat next year, a few sales at $7 would not be a bad place to start but I would be careful loading up too much. When we run out of one class of wheat the futures contracts can act very strange. If you need to move old crop before corn your options are very limited. The spread between feed wheat and milling wheat has widened significantly. Milling wheat basis will be very strong for the fall and through the spring. If there is any way you can hold it, the market will pay.
The biggest supply issue cotton had was the question about how many acres were planted. USDA put those concerns to rest and showed we ended up planting plenty of cotton acres. Cotton does have a demand story building but it can fall victim to the outside markets even more so than the grains. If the economic recovery continues to look very robust, cotton should find some upside. But if the increasing cases trip up the recovery, cotton will pay the biggest price for that. It traded through 90 cents but was unable to close above that level. Everyone needs to be selling some cotton around 90 cents.