Corn, Wheat and Cotton have all had a very strong week. The way corn traded up double digits several times this week everyone was asking what new news had hit the market. The only real new info we saw this week was in ethanol production and grind which have been exceptionally strong. Runaway energy prices are a big boon for ethanol demand and therefore for corn. Ethanol production was higher than we have seen in the last 5 years and margins are huge. Ethanol producers can lock in great positive margins for at least 6 months now which we have not seen in a very long time. Last summer, ethanol demand was almost nothing due to lockdowns and crude going to negative prices and exports were going gangbusters so they were our savior. This year we have not seen very good exports but ethanol demand is huge so corn has good demand to support.
This summer everywhere we looked in the markets it was bullish, we were burning up the crop and had huge demand domestically and abroad and inflation pressure. The rosy picture is not quite as rosy across everything anymore. We have some real threats to this market but that is not to say that everything is negative, it is just that we have more potential in both directions rather than just higher. The two biggest bearish threats are the tepid pace of exports and raising supply. The yields we are seeing coming out of the midwest are generally better than expected. They are not a record in all areas but generally better than feared. The rain that fell at the end of the season really helped a lot of acres. We have a USDA report on November 9th that we feel there is a decent chance of raising yields. South America is getting beans planted much faster than last year and that opens up more acres of second crop corn production so we could see more production down there. Exports have been slow recently and there is some fear in the market that USDA could lower export estimates but it may be premature for that.
There are still bullish forces in the corn market as well. Overall inflation should continue to keep corn supported. New crop corn has actually made new highs this week as inputs are so high, corn knows that it is going to have to work hard to make a case to keep acres for next year. As mentioned above, corn is now an energy crop due to ethanol and energies are higher across the board. This week, corn hit some technical levels and brought a lot of fund money back into the market. With all the liquidity and capital looking for returns, momentum is a big factor. However momentum can also turn on us and go the other way too.
What To Do
The USDA report for next Wednesday has potential to be negative. However, even if they do raise yield the most important thing is how that compares to how much the market was expecting them to raise it. If everyone expects an increase, then a yield increase will not be bearish by itself as long as its not more than what was expected. We could get an increase and still close higher on report day. But the fact remains that there is downside risk. If you have basis contracts that need to be priced vs December and/or need cash flow before the end of the year, use this opportunity to get some pricing done.
Basis has already recovered from this huge Southeastern crop and is going higher. Trains are not performing well so there has already been some quick ship opportunities in many markets. If you do not need the space, be patient on basis and wait for a better opportunity.
New crop still has some work to do with input prices so high. I am going to be more patient on corn new crop than I am beans. Be looking close to $6 to get started on next years corn.
While corn still has a lot of bright spots in the fundamental picture, we have to look quite a bit harder to find bullishness in beans. Just in the last month, we added a lot of beans to last years balance sheet, increased yield for the crop that’s in the field in the US, and got the crops off to a great start in South America. We also have not had much Chinese purchase activity in the last few weeks. With South American planting at such a fast pace, they will have beans ready by January this year instead of after Feb like last year. That means we have a narrower window where we have a competitive advantage to the export market. We need to be exporting beans NOW and we are slow. There is news of lockdowns in different parts of China which may be part of the reason or they are just betting on South American production. A crop planted is not guaranteed to be a bumper crop so there is still some risk there but the risk is much smaller now with the extra padding we have on the balance sheet. Beans are also much lower cost to produce so will not have to work as hard for acres next year. We need to adjust our expectations for beans and be more aggressive at pricing them.
What To Do
Basis is still strong in a lot of markets. Container exports are enough to keep up the pressure on the Southeastern processors and are really helping our basis. It has weakened in some markets but it feels temporary as there is a tremendous amount of truck pressure now due to bins being full of corn. Deferred basis bids are still very strong, even with the prospect of a decent crop in the Southeast. Make plans now to move your harvest beans. You can lock in deferred bids as long as they are better than historical for you, but you do not need to be aggressive or sell any cheap bids in Jan/Feb. There is huge carry in the bean market so hedging beans is also a good play to protect them in the bin and wait on basis. I would be scaling in sales on both old crop and new crop. You do not need to sell the whole crop (either old or new) but there is much more downside risk in beans than we had a few months ago and we need to make sure we are managing our risk.
Wheat is always a very political crop and that has greatly increased its volatility now. Exporting countries are trying to slow down exports to keep a lid on food inflation and countries that have to import are doing whatever they have to to get their hands on inventory. They cannot run out. How long this continues is anyone’s but there is lots of risk in both directions on wheat. We have had lots of days for fieldwork in the Southeast and we are well ahead of the planting pace of the last few years in some markets. I think this will increase acres in wheat heavy areas but not everywhere due to the cost of inputs.
What To Do
There are very good wheat bids to the flour mills right now with many places over $8. If you have a flour mill within easy distance and you need to move some at harvest, I would be locking some in now. After you lock a little in on a good basis or if you are not within easy distance to a flour mill then I would be hedging wheat.
Cotton is the only commodity we follow that has had really exceptional exports. China has been buying lots of cotton in the last few weeks. Cotton is typically weak going into harvest but has bucked that trend. Much like wheat, how high it can go is really anyone’s guess now. We are at levels we did not think possible only a few months ago. Do not overthink it, if you have cotton to sell, sell it! Start hedging/selling new crop over 90 cents!!