Is there more upside left in the market?
Corn, soybeans and wheat have made big gains lately. Is there much room for them to go higher?
The month of August was a good month for the grains. Wheat was the weakest of the grains, with Minneapolis gaining 4.5 cents, Chicago picking up 13 cents, and Kansas City posting an impressive gain of 28 cents. But the real strength came in corn (which rallied 31 cents) and soybeans (up 61 cents).
The strength was enough to push Minneapolis wheat to highs not seen since June 10, corn to levels not seen since March 30, and soybeans to highs not seen since Jan 15. From the recent low to the recent high, Minneapolis wheat has rallied 43 cents, corn has rallied 44 cents, and soybeans have gained $1.37. The question now is how much strength does the market have left and should I be selling at these levels?
The market has been able to stage this recovery because of demand and production concerns. Export demand for corn and soybeans has seen an impressive uptick over the past few months because of product availability. The U.S. has the product, and no one else does at this time. Rumors are that Brazil was such an aggressive seller of soybeans they are now virtually out of product and might need to come to the U.S. and buy soybeans to meet their own domestic demand. That is also helping to keep China in the U.S. soybean market, but then again having the cheapest soybeans in the world does not hurt either. In the first seven months of their marketing year, Brazil has already exported 77 million metric tons of soybeans. Using the U.S. Department of Agriculture's estimate of 81 million metric tons exported annually, Brazil only has 4 million metric tons left to export over the next five months and are expected to export all of that in September.
The export marketing year has just ended for corn and soybeans. For the 2019-20 marketing year, corn export sales are going to come in a little short of expectations while soybean sales will be a little over expectations. But for the 2020-21 marketing year, both corn and soybeans export sales paces are at record high levels for this time of year.
Weather is the other driving force that is helping the grains push higher, more specifically, the drought in Iowa which is expanding into Illinois and Nebraska. Corn and soybean conditions have dropped dramatically over the past two months. At the start of July, Iowa had record crop potential and within eight weeks the outlook has changed to one of hoping to see an average crop. Looking at the U.S. Drought Monitor map, you can see how much Iowa has changed throughout the growing season. On May 26, Iowa reported only 22% of the state in some sort of stage of drought. As of Sept. 1, that had increased to 99% of the state. August weather reports for Iowa noted the state received only 25% of its normal rainfall.
But what does all this mean? Well it means USDA will likely lower its production estimate in the Sept. 11 Crop Production report. And the cut could be equal to the increase we saw in the August report. USDA was correct to make that higher adjustment in the August report at the time, but August was a rough month on production. It is not likely USDA will increase demand in the September report, but yield and harvested acreage could see an adjustment.
Will this help the markets rally? The grains are starting to look tired. This is not saying there is no strength left, but that a correction would be healthy for the crop to retrace and reset.
Technically the market is at a good level to consider making sales. Basis levels remain strong (better than the five-year average) and with the current exports sales on the books, basis is not likely to see a big decline (maybe a set-back at harvest then recover).
The week’s news was led by Monday afternoon’s Crop Progress report. The report was negative, as conditions did not drop as much as expected. The only number being reported for wheat was spring wheat’s harvest progress, which came in at 69%, 5% better than expected by the trade.
Stats Canada’s production report was neutral wheat, as although the numbers were higher than last year, the biggest production increase was in durum, not winter or spring wheat. Stats Canada estimated all wheat production at 35.7 million metric tons versus expectations of 35.4 million metric tons and 32.3 million metric tons last year. Durum production was at 6.9 million metric tons versus expectations of 6.5 million metric tons and 5 million metric tons last year. Spring wheat production was estimated at 25.9 million metric tons versus 25.7 million metric tons last year.
August is the month that sets crop insurance’s harvest price for spring wheat and durum. The official price for spring wheat is at $5.06, a drop of 9% from the base price. Durum’s harvest price is $5.23.
Corn’s crop condition rating was also better than expected, dropping 2% instead of the average trade estimate of 3%. This puts corn’s crop rating at 62% good/excellent. All of the major states saw steady to lower conditions as dry conditions continue to take its toll on the western Corn Belt. Iowa and Ohio continue to be the worst rated crops at 45% good/excellent. Corn’s crop development continues to surge ahead of its five-year average pace as 63% of the nation’s corn is in dent versus 56% average.
Reuters reported this week that the corn price in China has increased so much it might result in China having a 30 million metric ton shortfall in supply, which means they will be forced to increase their imports of corn. So far China has secured about 7 million metric tons of those bushels from the U.S.
Ethanol production continues to flip back and forth. Last week’s production was disappointing, coming in at 922,000 barrels per day, down 9,000 barrels from the previous week. Stocks were also at 10-week highs at 20.88 million barrels, up 473,000 barrels from the previous week.
Soybean conditions were as expected, down 3% to 66% good/excellent. Just like in corn, all of the major soybean producing states saw conditions either remain steady or decline. Soybean’s crop development stage is running at its five-year average pace of 8% dropping leaves.
Soybean exports slowed down to start the week with only one sale being reported. China was in early in the week and bought 132,000 metric tons of soybeans. But by the end of the week, more sales were being reported as China was back in buying another 132,000 metric tons of US soybeans while an unknown destination bought 318,000 metric tons.
USDA’s July crush report was released this week and once again it showed another record monthly crush. Crush for the month was 184.5 million bushels, higher than the average trade estimate of 183 million bushels while stocks were in line with expectations.
Brazil’s soybean growing regions have only had 75% of normal precipitation over the last month. Planting will begin in late September or early October. This could result in Brazil delaying planting of soybeans, which in turn will delay their ability to enter the export market timely, giving the U.S. more opportunity to supply China with product.
Cattle slipped lower for the second week in a row due to a disappointing cash trade. Cash bids slipped another $1 last week with most of the activity taking place at $104. But this week also saw a lower boxed beef market, which is a signal that maybe domestic demand is starting to slip. Traders are also worried that the drought in the desert Southwest could result in producers needing to pull calves off pastures early and herd liquidation.
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