Weekly Market Update – January 21, 2022

There has been a lot of news this week that has had an effect on the ag markets but most of it has been in the outside markets not specifically ag news. As the US Fed is getting a more hawkish tone tapering bond purchases and talking about 4 rate increases this year, more money is flowing out of equities and riskier assets (like crypto and meme stocks). Some equity indexes have entered correction territory this week since they have dropped so much. Adding fuel to the fire some stocks that have greatly benefited from Covid lockdowns are starting to show some signs of losing their luster like Netflix whose subscriber growth has slowed and Peloton who is actually ceasing production of their exercise equipment as sales have slowed and they find themselves with excess inventory. Commodities are part of an inflation hedge too but I do not see the air coming out of them right now since they have underlying fundamentals that should help support. Covid case numbers have dropped as dramatically as they rose in South Africa and are starting to fall steeply in the UK. It looks like the US may be starting to fall as well, hopefully signaling the peak may be behind us.

Another headline that is having a big effect on commodity prices is the tensions increasing between Russia and the Ukraine (again!). Russia today said point blank in Switzerland that they had no intention of invading but I doubt they would say if they were going to. Their increasing tensions have helped wheat and corn find strength because Russia and Ukraine are big exporters of wheat and Ukraine is also a big exporter of corn. If there is a conflict there it would take some world supply off the balance sheet and we do not have enough of a buffer to lose any. /span>

We have seen a big increase in the trading ranges in wheat, soybeans and cotton in the last few weeks. Corn has stayed fairly constant compared to the others. With balance sheet tightness, geopolitical tensions, threatening weather, and still lots of cheap money chasing returns expect the volatility to stay with us for a while. Going into the North American growing season it will probably increase. There are not enough acres for every commodity to gain the acres it needs to be comfortable, so weather is going to be absolutely critical. Buckle up!

US Weather
We are still a little ways out from US summer growing season but there are many areas still desperately dry. There is a lot of chatter about 100 year drought cycles but until we get there, it will all be just chatter. Most of the wheat belt is forecast to stay very dry over the next month but the western part of the corn belt may turn a bit wetter. Long term forecasts have plenty of margin for error so there is not much confidence in them at this time but we need to start paying attention. I do not think there is much weather premium for North America priced in the market yet.

Soybeans have been the most volatile this week. The market sold off hard on rain falling in the hard hit areas in South America. Now it has come roaring back to new highs. There is a lot of damage done already to many growing areas in South America and the market is trying to get a handle on how much still. Bean oil has taken off higher on strength in energies and edible oils and that has helped push soybeans higher as well.

Everyone needs to be selling both old crop and new crop beans!! If you want to roll the dice, all we need is to finish the season dry in South America and/or start of dry in the US and this market will leg higher again. But no one knows the weather so there is some risk in both directions. $14+ old crop before basis and $13 new crop needs to be sold! I think everyone should catch up sales to at least 80% on old crop and 25-30% on new.

Corn has traded the same $5.90-6.15 range for what feels like forever now. When beans got hit so hard with fund selling, higher energies helped support corn. Everyone that uses corn is making money right now. A good part of the ethanol margins have come out, but they are still making money. USDA is probably going to have to increase ethanol usage significantly if we keep going at this pace. Exports have not been that impressive but with big questions about South American production and tensions in the Ukraine we may have the only excess supplies later in the year.

I am not as aggressive on pushing sales on corn right now as I am on beans. Corn has a lot more work to do on acres for new crop but as we get into setting the insurance price in Feb, we need to be looking harder at new crop sales. Hopefully we get a shot closer to $6. On old crop, sell basis on train delay opportunities. Nothing wrong with getting some sales on above $6 with a good basis. We do not know cost of production for next year yet, but we know last year’s and since almost everyone had great yields, we have great profit opportunities at these levels.

Funds had been aggressive sellers of wheat and there were some big profits in short positions. With geopolitical tensions flaring in Russia, the tide turned in a big way on wheat. Funds started taking profits on short positions (buying futures) and some getting long. Basis has also strengthened on old crop wheat in our market.The forecasts do not look good for the bulk of the US winter wheat as it remains very dry. Russia says they will move forward with their export quota covering the whole period between now and June, but are reducing export taxes for shipments next week. After the break in wheat prices and even with the recovery we have seen so far, I do not think we have much of a weather premium in the wheat market. We will start getting condition ratings sometime in Feb and that should catch the market’s attention. 

I would wait until we are able to break through $8, but be ready to make some more sales on old and new if you have wheat planted. 

Cotton hit contract highs and could not close higher yesterday in a key reversal which is seen as a bearish technical picture. Cotton had been finding strength on strength in energies with the rally in crude seen as a big catalyst helping cotton rally this week. Cotton had gotten extremely overbought so a setback is not necessarily a bad thing if it can overcome the key reversal and find support. Strength in the dollar and weakness in the stock market added to pressure on cotton. Sell old crop and new crop cotton!