The markets continue to roll with all three of the major commodities seeing strong gains this past week. Soybeans have posted the strongest gains followed by corn, with wheat following behind as a reluctant participant. Weather and demand have been the main drivers with hot dry conditions the main weather issues coupled with aggressive Chinese buying.

Weather rallies normally do not linger into the end of August, but this year they have. Weather forecasts were still calling for the rest of August to be hot and dry in the Corn Belt. But the six-to-10-day forecast is calling for temperatures to be below to much much below normal for North Dakota, and below normal for the Southern Plains and western Corn Belt. Precipitation is expected to be below normal for the Plains but above for the Corn Belt. The western Corn Belt is expected to see dry conditions linger for the next 10 days. Although temperatures are expected to drop to be below normal, the dry conditions will continue to cause crop deterioration.

The past week’s rally was encouraged by the Aug. 24 Crop Progress report. The report showed a lower crop rating than expected for corn and soybeans, but a little better rating for spring wheat.

Spring wheat’s crop condition rating improved 1% more than expected as most were looking for conditions to remain unchanged. Harvest progress also came in 3% higher than expected. Harvest progress added pressure as this week was a good week for harvest. Winter wheat harvest continues to advance, but at a snail’s pace. The report put winter wheat harvest at 97% completed, in line with expectations.

Corn’s crop condition rating took the biggest hit, dropping 5% from last week and 3% more than expected by the trade. The major producing states all saw declines. The weekly changes for the states were: Illinois: -4%, Indiana: -1%, Iowa: -9%, Minnesota: -1%, Nebraska: -7%, North Dakota: 0%, Ohio: -2%, and South Dakota: -6%. Iowa has had to deal with both the devastation from the derecho and drought conditions, which increased in intensity this week.

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Soybeans traded in a lackluster fashion on Aug. 24. The lack of export news and expectations for a small cut in crop ratings all helped to stabilize soybeans. But a lower than expected crop rating (1% lower than expected) helped to give soybeans strength overnight.

Soybeans were also supported by the surprise meeting between China and the U.S. The meeting was to review the first six months of the phase one trade deal. The meeting went well, and both sides are pleased with how the trade deal has progressed but also agree that China needs to step up its purchases in the fourth quarter.

China has been aggressively buying U.S. soybeans and corn to a lesser extent. Corn is a market that has a good chance to see exports increase. China’s demand for corn for feed is increasing due to the expansion of meat production there. So far to date China has released over 55 million metric tons of corn out of their reserves. This corn will need to be replaced at some point. Rumor has China needing to buy between 20 million and 30 million metric tons of corn this fall.

The rally in the grains is also getting help from technical buying and fund short covering. The funds have been carrying a large short position throughout the spring and summer. There was not much reason for them to lighten positions once we got past a rocky start to the 2020 planting season. Things seemed to improve as by the Fourth of July it looked like the U.S. could have a record setting crop. But then weather started to change, areas started to miss rains and pretty soon there was a drought situation in the western Corn Belt. The week of July 4, Iowa’s corn crop was rating close to 85% good/excellent but by Aug. 23 (seven weeks later) the corn crop had dropped to a crop condition rating of 50% good/excellent, a 35% decline. Iowa went from on the best-looking crops to one of the poorest. And the crop is continuing to see hot dry conditions that will likely continue to decrease yield potential.

This has helped the grains to rally but losing one state (even Iowa which is the largest corn producing state and second largest soybean producing state) would only cause the market to rally a small amount due to heavy stocks. But the drought is also affecting Nebraska and northern Illinois. This is on top of the derecho damage, which is also continuing to lower the potential size of the crop.

Technically the grains are flirting with the next level of resistance. December corn was able to trade through the $3.40 and $3.50 levels and now the market has its eyes on $3.63 and then $3.71. The November soybean contract broke through $9.15 and $9.27 and is now closing in on $9.37 and $9.65. Even Minneapolis wheat is joining in the run, nearing resistance in the December contract of $5.45.

World wheat production is starting to become a bit of a concern. Report of frost blanketing about 2 million acres of wheat in Argentina helped to encourage traders. Frost was also reported in Australia. To top off the frost concerns, the drought in Argentina is being labeled the worst in 10 years.

Corn got a shot in the arm to a friendly production estimate from the Pro Farmer Crop Tour. Pro Farmer’s Crop Tour results put the U.S. corn crop yield at 177.5 bushels versus USDA’s August estimate of 181.8 bushels. That equates to a production drop of about 458 million bushels.

Strong exports have added strength in the corn market as China was an aggressive buyer of U.S. corn. Japan and an unknown destination also bought corn this week. To date, new crop corn exports are at 527 million bushels compared to 218 million bushels last year, making this the second highest new crop export sales pace for this time of year. To date, China is set to import 6.4 million metric tons of U.S. corn in 2020, a new record shattering the old record of 5.15 million metric tons.

Last week’s ethanol production estimate was friendly coming in at a four-week high. Last week’s production was estimated at 931,000 barrels per day, an increase of 5,000 barrels. Stocks were estimated at 20.41 million barrels, up 139,000 barrels.

As was the case in corn, soybeans also saw a friendly production estimate from Pro Farmer. Pro Farmer’s Crop Tour put the national soybean yield at 52.5 bushels, which is 0.8 bushels lower than USDA’s current 53.3 bushels and would lower production by 63 million bushels if realized.

Soybean demand has been strong again last week with once again China and an unknown destination continuing to be aggressive buyers. A Bloomberg article quoted a Chinese official as saying China is looking at importing 40 million metric tons of U.S. soybeans this year, which would be a new record. China already has 12.5 million metric tons of new crop sales on the books versus just 260,000 metric tons at this time last year. New crop soybean sales are at 824 million bushels, a new record going into the end of the old crop marketing year.

Cattle spent the week on the defense with selling tied to a negative Cattle On Feed report. That in turn caused some technical selling pressure as traders took money off the table. Cattle are overbought and in need of a correction and this created that opportunity. Cash trade has been disappointing, dropping $2 from last week. Traders are worried that as the drought concerns increase, more cattle will be pulled off pastures and placed into feedlots ahead of expectations.

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