The grain markets have been able to give a little something to everyone over the past week. Just when most had ruled the grain markets were dead, they made a quick run back to recent contract highs, which reenergized the bulls. But the rally was just a dead cat bounce, which gave the funds the buying power to continue to liquidate long positions, on the backs of the new long positions.
The market rally on Wednesday, Feb. 24, seemed like a risk on session for the grains. Most of the contracts were rallying and making a test of the previous highs. But the rally was short lived as selling dominated the market the rest of February.
February is arguably the most important month for risk management due to the fact that this is when the projected prices for crop insurance are set. For most producers, crop insurance is the first line of risk management. And this year will be the first time in seven or eight years when most producers will have an opportunity to lock in at least cost of production and some even will be able to lock in a profit. But it will create some sticker shock.
The official projected prices for the 2021 crop year and the increase over last year are: hard red spring wheat at $6.53 (+15%); corn at $4.58 (+15%); soybean at $11.87 (+23%); barley at $4.18 (+25); canola at $20.60 (+20%); and oil sunflowers at $22.00 (+23%).
But it is not the increase in price that is causing the big increase in premium, it is the increase in the volatility factor. Volatility for hard red spring wheat increased 22% over 2020, corn’s volatility increased 35%, soybean volatility was up 37%, and canola’s volatility was up 38%. With the increase in price and volatility, crop insurance premiums also saw on average a 20% to 30% increase over last year.
Fundamentally, nothing has really changed as far as the grain market is concerned. Brazil is continuing to see soybean harvest delays and slow progress on the planting progress of the second corn crop. As of Feb. 26, Brazil’s soybean harvest was estimated at 23% complete versus 35% average. The harvest progress on the first corn crop was estimated at 37% completed versus 33% average. The planting progress of the second corn crop was estimated at 30% completed versus 64% average.
Brazil’s weather forecast is calling for rains to continue through the middle of March. Argentina’s weather forecast is calling for hot and dry conditions to dominate through the middle of March. But then a drier pattern is expected to move into northern Brazil, which will allow for harvest progress to resume. There is even a hint of rain moving into Argentina by mid-month. Brazilian famers are reluctant to plant corn after March 1 as it makes the corn more susceptible to weather stress, but with prices where they are and for how strong the demand is, producers are looking at taking that risk.
The one fundamental that is causing concern is exports. There has not been a major export sale of any U.S. grain announced since China went on holiday. That has traders concerned the there could be massive numbers of cancellations on the horizon. That is doubtful. As of the end of February, corn export sales were at 89% of expectations while soybeans sales were at 98% of USDA’s expectations. Granted, corn shipments have been lagging as they are only at 39% of expectations while soybean shipments are at a strong 85% of expectations. That tells us there could be a slight risk in corn cancellations, but not for soybeans.
To add to the poor export sales, China made the comment that they might be forced to slow down crush or close some plants due to the inability to get soybeans from Brazil in the short term. China is currently importing about 8 million to 9 million metric tons of soybeans a month. Currently Brazil is on track to export 5.5 million metric tons to China in March. That leaves China short 3 million to 3.5 million metric tons of soybeans.
The poor export sales report combined with China’s comments and the fact that most of the grains were trading at or near recent contract highs scared weak longs into liquidating positions. That caused the market to melt down in the short-term going into the end of February.
February’s end of month sell off was also attributed to end of month profit taking, the reallocation of portfolios, and technical selling from weak longs once the grains traded to recent highs. In addition, there have been demand concerns as China floats the idea of slowing down domestic crush due to new outbreaks of African swine fever and the inability to get Brazilian soybeans.
The big winners for the month of February were: Lean hogs up 25%, RBOB gas: up 21%, crude oil up 18%, heating oil up 16%, copper up 15%, and soybean oil up 15%. The losers for the month: gold was down 6% and rice was off 3%.
The grains appear to be setting up to trade in a range between the recently established highs and lows. The market is reluctant to take too much premium out of the market due to the potential for increased demand. But with China out of the U.S. export market, it is likely U.S. weekly grain exports will sharply decline. This is a seasonal development, but it will cause traders to be nervous. The next big reports from USDA are a month away but we will start to see planted acreage estimates within two weeks.
On a positive note, USDA showed another record crush estimate. The National Oilseed Processors Association crush estimates have been showing record paces the past five months in a row, but the NOPA organization only accounts for about 80% to 85% of the U.S. crush plants. This week’s USDA January crush report put January crush pace at 196.5 million bushels versus expectations of 195.6 million bushels, which was a record for January. It’s hard to believe USDA won’t increase soybean crush in their March supply and demand estimates.
USDA’s weekly crop progress report will not be released until April 1, but there are a few states starting to release weekly estimates. The crop progress estimates released March 1 were not overly surprising, but more of a confirmation. The only states reporting weekly crop progress at this time are Kansas, Oklahoma, and Texas and all three showed another week of declining conditions. Kansas’s winter wheat crop dropped 3% to 37% good/excellent, Oklahoma’s dropped 2% to 48% good/excellent, and Texas’s crop dropped 2% to 28% good/excellent. On top of that, Texas is reporting its wheat crop is 20% headed versus 19% last week and 5% average. Texas is also reporting corn planting progress at 3% complete versus 7% average.
The market has some big reports fast approaching that will definitely set the tone and market direction. There is the speed bump before we see the Prospective Planting’s estimate and Quarterly Grain stocks. The March Crop Production estimate will be released on March 9. The March report is expected to show small adjustments to the demand side, but those could be enough to start the rally. The report will likely show no changes to wheat’s estimates, but it should increase corn exports and, more importantly, should show an increase in both soybeans crush and exports.
Cattle have struggled the past few weeks mainly because of a stall out in the cash market. Cash bids have hovered around $114 for the past three weeks and that has traders sitting on the fence. Demand remains strong, and expectations have demand continuing to grow in the second quarter of the year. But economic concerns and heavy slaughter weights are weighing heavy on the market. The House has passed the pandemic bill and it is now in the Senate’s hands to move the bill through. Once this bill is passed and as more vaccines are administered, the sooner the economy can start humming again. That will be a good day for the livestock industry.
“The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results.”