The third week of May was another tough week in the grains — all except for corn and July canola, which were the only markets to end with weekly gains.
The pressure was due to negative fundamentals as rapid planting progress is giving the grains a chance at above average yields in most regions. To top that off, most of the U.S. is sitting with adequate to surplus moisture conditions. Adding to the selling pressure were rain events in the Northern Plains. Although most of North Dakota came up short on the forecasted rain, there was enough rain in most regions to help with germination.
The only reason corn was able to end with gains the third week of May was due to China’s aggressive buying of new crop corn. In four out of the five sessions that week, China bought corn. By the end of the week China had bought over 5 million metric tons and for the past 12 days leading up to May 26 China had committed to buying 10.8 million metric tons of new crop U.S. corn. That is over half of the corn they expected to import in 2021.
For the next four to five weeks, weather will be the main driver. Long term forecasts are calling for the Northern Plains to see warm and dry conditions continue while the Corn Belt and Southern Plains are expected to see warm and wet conditions. But first the Northern Plains will have to get through a late week cold front that is expected to bring freezing temps to the northern tier counties.
The grains started the last week of May gapping lower Sunday night and then extending session losses throughout the night. The May 24 session had the looks of a train wreck. Corn was pressured by ideal growing conditions and expectations that acreage and yield could both see increases. Soybeans were under pressure from the same good growing conditions and disappointing demand. Wheat was under pressure from recent rains in the Plains, with western North Dakota seeing some decent rains over the weekend. Expectations for record production in Kansas added pressure.
But one thing all of the grains had in common — they have been under heavy selling pressure for a few weeks with little recovery. Rapid planting progress and the expectation that more corn acres were planted than expected keeps the corn market at bay. Probably the most negative aspect is that basis levels are starting to widen out in the country, which is a sign of slowing demand. To top off the improving fundamental picture, a lot of livestock feeding operations switched from feeding corn to feeding wheat, which has slowed down the domestic demand for corn. Ethanol production has been seeing a steady increase which has helped make up for some of the feed demand decline. Export demand has been strong. July corn has dropped 15% from its high while December corn is off 19% from its high. Corn is nearing the 50% retracement levels as July is within 60 cents of its 50% retracement while December is 3 cents away. The 50% retracement level in corn is also just below the psychological $5 level and the same area on the chart where corn gapped higher after the Prospective Planting’s estimate.
Wheat also took a good hit. Wheat has been a follower for most of the past year, and that is the role it is playing once again. There are still concerns in spring wheat country as not all of the Northern Plains received rain. The rain that has fallen so far is not going to bust the drought, but it will help some areas improve the drought rating. There is a lot of wheat in the world and without the U.S. being able to break into the export game, which makes it hard for wheat to see much push. Add on top of that the potential for a record Kansas crop and rain in the Northern Plains and you have a lot of weak longs baling out of wheat. So far both July and September Minneapolis wheat have dropped 15% from their highs and both have broken through their 50% retracement levels.
Soybeans have not seen the same selling pressure that wheat and corn traders have experienced. It almost seems like soybeans have faded into the shadows and have been avoiding the spotlight. Demand has slowed down to a trickle. Like corn, there is talk of basis levels widening, which stands to reason with slow export sales. The main driver of the soybean market as of late has been bean oil and even that market has come under heavy selling pressure. Fundamentals are improving for soybeans as well, but maybe not as much as for corn. Planting progress remains rapidly ahead of the average pace which would result in expectations for better than trend line yields, but so far, the market has not talked about higher yields. There is even talk of maybe steady to lower soybean acreage due to the expected increase in corn planting. Soybeans have dropped about 9% from its recent high and remains a long way away from its 50% retracement level ($2.50 away in the July and $2 in November).
For the second week in a row, traders have overestimated planting pace and overestimated the affects that the weather has put on the crop. As of May 23, corn planting was estimated at 90% completed, 3% below expectations. Progress is still 10% ahead of average pace with only Kansas and Colorado lagging in planting. Soybean planting progress was estimated at 75% complete, 4% lower than expected, but still 21% ahead of average.
What came as a big surprise was another lower crop progress estimate for winter wheat and a sharply below average rating for spring wheat. Winter wheat conditions were estimated at 47% good/excellent, 3% lower than expected by the trade. Now, most were expecting to see a low rating for spring wheat, but were not prepared for how low it came in. Spring wheat conditions were estimated at 45% good/excellent, 12% below expectations and 35% below last year’s May 31 estimate (which was the first estimate for the 2020 crop year). This is the lowest spring wheat has been rated at for this early in the growing season since 1988. Barley conditions were also much lower than expected, coming in at 47% good/excellent, 20% below last year at this time.
Spring wheat planting progress was also friendly, coming in at 94% completed, 3% below expectations but still 9% above average.
It is likely the grains will continue to trade sloppy to lower due to fundamental news (improving weather and slowing export demand). The next major Crop Report does not come out until end of June and with a long weekend fast approaching, it will be hard for the grains to stage much of a recovery, especially if weather remains as is. That being said, there is a lot of pressure for this summer growing season to go perfect, because of tight stocks.
Wheat is seeing a little export interest as Japan is tendering for 124,620 metric tons of wheat from Canada and U.S., and Tunisia is tendering for 92,000 metric tons of soft milling wheat. European Union wheat exports are 26% lower than this time last year.
As of May 21, Brazil’s first crop corn harvest progress was at 97% complete versus 96% average. Southern Brazil received good rains last weekend, but the central regions of Brazil remain dry. This has led to Michael Cordonnier of Corn and Soybean Advisor to lower his corn production estimate for Brazil to 95 million metric tons. He is also estimating U.S. producers will plant between 93 million and 94 million acres of corn and between 87 million and 88 million acres of soybeans. In other South American news, Argentine port workers are planning another 48-hour strike and Brazil lowered their May soybean export estimate from 16.2 million metric tons to 14.9 million metric tons. Brazil’s soybeans are currently about U.S. $1 per bushel cheaper than U.S. soybeans.
Late in the week, reports China is restricting corn imports into their free trade zones and about 1 million metric tons of old crop corn sales were cancelled surfaced. This news was not confirmed but set a shock wave through the corn market.
Last week’s ethanol report estimated production at 1.011 million barrels per day, down 21,000 barrels per day from last week. That was higher than the pace needed to hit USDA’s target and 40% higher than the same week last year. Ethanol stocks were also supportive as stocks dropped 19 million gallons and are now at the lowest level since December 2016.
Cattle started the week off lower due to pressure from the May 21 Cattle on Feed report. The report was not friendly cattle as it showed more cattle in the feedlots than expected, higher placement than expected, and marketing as expected. Cash trade has also been slightly disappointing and that added pressure to the live cattle. Feeders, on the other hand, have seen good support from the drop in feed costs.
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