The volatility in the grains has subsided a bit over the past few weeks as it seems traders have moved to the sidelines. The funds have continued to be modest sellers of the grains, but a lot of the smaller traders and commercials have stepped away from the market. It appears that most are looking to see just how the weather treats the crop the last week of July and into the first week of August. Forecasts are calling for improving conditions in the long-term forecasts, but the last week of July to first week of August are expected to bring extreme heat and little moisture to the Corn Belt.
The improving weather forecasts caused the early week gains from Monday, July 26, to quickly turn negative. Another disappointing export shipments estimated added to the selling pressure. Early weather forecasts were a bit negative as the forecast is calling for cooler and wetter conditions for most of the U.S. growing region by this weekend.
Corn and soybeans have been comfortable trading in a range with support being the 100-day moving average. Monday was no exception. Once corn and soybeans traded to their 100-day moving average, bargain hunter buying started coming off the fence and entered the market on the long side.
Wheat was unable to participate in the late-stage recovery Monday. Wheat did trim session losses but remained in the red throughout the session. Harvest pressure and talk of better than expected yields put pressure on the wheat complex.
But as you could have guessed, it was not just bargain hunter buying that helped to push corn and soybeans higher. It was also another change in the weather forecasts. This time the forecast got drier, which has a lot of traders concerned about the size of the corn and soybean crop.
The July 26 Crop Progress report added support to the market. Spring wheat conditions were expected to decline 1% this week, but instead conditions dropped 2% to now be at 9% good/excellent. The only state that showed improvement again this week was Idaho which improved 5% to 27% good/excellent. The rest of the states either were left unchanged or dropped. Four out of the six major states are reporting no spring wheat in the excellent category. Spring wheat harvest is just getting going with 3% harvested as of July 25. Winter wheat harvest is nearing its end as 84% is in the bin as of July 25.
Traders were looking for corn’s crop rating to improve 1% this week, but just has been the case this year, traders are being more optimistic on the crop than mother nature. As of July 25, 79% of the corn was in silk and 18% was in the dough stage, both close to the five-year average. But corn conditions came in at 64% good/excellent, a drop of 1% and 2% below trader’s expectations. Minnesota’s crop is now rated 38% good/excellent. North Dakota’s is at 21% good/excellent, which is the lowest crop rating for the state’s corn in history. South Dakota is at 30% good/excellent.
Soybean conditions were not much better. As of July 25, 76% of the nation’s soybeans were in bloom and 42% are setting pods. With little to no rain in the forecast and much above normal temps expected for the rest of the week, it is likely soybeans will be aborting pods, especially in the Northern Plains.
Soybean conditions were also expected to improve by 1% but instead dropped 2% to 58% good/excellent, a 3% swing from expectations. Most of the major states saw declines. North Dakota’s crop is now rated 17% good/excellent, Minnesota is at 36% good/excellent, and South Dakota is at 26% good/excellent. North Dakota’s soybean crop condition rating was the lowest rating for the state since they started tracking conditions.
The Wheat Quality Tour started Tuesday, July 27, and the general thought was that the first day of the tour would find the best wheat, and that the worst would be found on day two. The findings for the first day had yields ranging from 0 to 63 bushels/acre. The average yield for day one came in at 29.2 bushels/acre versus 45.6 bushels/acre in 2019 and versus the five-year average of 43.3 bushels/acre. That was the second lowest yield for the first leg reported for the tour in history. Day two findings resulted in an average yield of 24.6 bushels/acre versus 40.5 bushels/acre in 2019 and versus the five-year average of 42.2 bushels/acre. The tour was scheduled to wrap up on Thursday, July 29.
If you look at the spring wheat balance sheet, it appears that we could easily run out. Spring wheat planted acreage was estimated at 11.58 million, down 670,000 acres from last year. Harvested acreage is estimated at 11.22 million, which shows abandonment at about 3%. That likely will grow to 10% to 15% before harvest is over. Spring wheat yield is estimated at 30.7 bushels per acre, a decline of 17.9 bushels from last year. This puts spring wheat production at 345 million bushels, a drop of 241 million bushels from last year. For North Dakota, planted acres were at 5.95 million acres (increase of 250,000 from last year), harvested acreage at 5.75 million (up 120,000 from last year) and yield of 28 bushels, down 21 bushels from last year. This puts the state’s spring wheat production at 161 million bushels down 115 million bushels from last year. The spring wheat production estimate is the lowest in 33 years.
With what we know from the July Crop Production report, spring wheat stocks are expected to drop from 235 million bushels in 2020 to 119 million bushels in 2021. That is using the assumptions above (which came from the July Crop Production report as well). But when you dig deeper into the spring wheat supply and demand table its gets a little interesting. First, the U.S. imports 70 million bushels of spring wheat into the country with most coming from Canada. But with Canada’s drought situation that is unlikely to happen. Also, the production estimate for spring wheat is using an abandonment rate of 3%. In drought years abandonment usually increases to 15% to 18%. Increasing abandonment to 15% and cutting imports in half, would result in an ending stocks estimate for spring wheat closer to 32 million bushels (cutting imports in half to 35 million bushels and lowering production by 52 million bushels due to abandonment). This could make for an interesting winter in the spring wheat market.
Producers should hold off on making wheat sales as we see how much traction the Wheat Quality Tour gets. Basis levels are tightening up (which is unheard of at harvest) so there is an incentive to move wheat off the combine and look to re-own in March.
Corn and soybeans are seeing decent trading ranges during the day but are not holding gains into the close. It seems like traders are looking for verification before taking a position. Exports for both continue to be disappointing.
It is all about weather for the row crops. Most think corn is out of the woods and should be able to come in above average while the jury is still out on the soybeans. The next seven to 10 days will be crucial as the hot and dry conditions the Northern Plains has been experiencing are expected to park over the Corn Belt.
Traders expect that the central and eastern Corn Belt production to be large enough to make up for the losses in the Northern Plains and western Corn Belt, and that is keeping a lid on corn’s ability to rally. That might be tough since the tri-state region of North Dakota, South Dakota, and Minnesota has 20% of the U.S. corn acreage and 23% of the soybean acreage.
Last week’s ethanol production estimate was friendly. Production came in at 1.014 million barrels which was a drop of 14,000 barrels per day from the previous week. Stocks were estimated at 22.73 million, up 215,000 barrels from the previous week and the second highest level for this late in July.
For soybeans, worries that Chinese soybean demand will slow for the rest of 2021 due to increased wheat feeding, poor crush margins and poor hog margins added pressure. That was somewhat offset by the report that Argentina’s Parana River is at its lowest in 77 years. The river is used to move about 80% of the country’s grain exports.
Cattle got a shot in the arm from two friendly USDA reports. The Monthly Cattle on Feed report was friendly as it showed less cattle being placed into feedlots than expected and marketings to be better than expected. That means feedlots are current (which could help explain the drop in slaughter weights). The Semi-Annual Cattle Inventory report was also friendly cattle as it continues to confirm the lack of herd expansion. The reports were friendly enough to push the feeder cattle market to new contract highs.
“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.”