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Weather and recession fears trump USDA report

The biggest change in USDA's crop production report came in North Dakota where the average winter wheat yield increased 11 bushels per acre from June’s estimate to a new all-time record yield of 58 bushels.

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The market is watching the chances for rain closely as drought areas grow.
Erin Brown / Grand Vale Creative LLC
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Editor's note: Catch Randy Martinson every Friday after markets close on the Agweek Market Wrap at agweek.com.

The grains were able to close out the first full week of trading in July with gains.

The short week of trading did not start off on good footing as heavy selling dominated the market the first two sessions of the week, but then the grains were able to shake off the selling pressure and stage a nice recovery.

As of Wednesday July 6, Chicago and Kansas City have retraced 38% from their mid-May highs while Minneapolis is 37% off of its high. Minneapolis September peaked at $14.05 on May 17 and the current low was established July 6 at $8.70. The last six weeks has seen Minneapolis September retrace $5.35. If this recovery is for real, we should expect September Minneapolis wheat to test the $11.35 level.

December corn peaked at $7.66 on May 16 and the current low was established on July 6 at $5.66 (24%). The last six weeks have seen December corn retrace $2, if this recovery is for real, we should expect December corn to test the $6.65 level.

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November soybeans peaked at $15.8475 on June 9 and the current low was established on July 6 at $13.025 (16%). The last four weeks have seen November soybeans retrace $2.82. If this recovery is for real, we should expect November soybeans to test the $14.45 level.

Technical buying combined forces with fundamental strength to push the grains higher to close out the week.

Thursday’s Drought Monitor Map confirmed that the dry areas of the eastern Corn Belt and Delta states are increasing. According to the report, Illinois was reporting 68% of the state was in some stage of drought, up 10% from last week. Indiana reported 94% of the state is in some stage of drought, up 6% from last week. Iowa had 50% of its state in some stage of drought.

If the current forecast holds, this will result in the need to bring all that weather premium back into the market.

The grains were in need of the selloff to correct the overbought condition but as the market always does, it overplayed its hand and now needs to maneuver its way to equilibrium.

The strong close for the first week of July spilled over into the opening of the second week of July, as the grains gapped higher in the open Sunday night. But technical selling mixed with a slight change in the weather forecast sent the market into a tailspin.

The grains gapped higher Sunday night and rallied to post strong gains by the start of the day session. Early support came from technical buying, which was spurred on by weather forecasts calling for a high-pressure ridge to set up over the U.S. by late week and linger for the rest of the month of July. A small change in that forecast showed up in the noon update Monday as rain creeped into the one-to-five-day forecast. This encouraged some funds to return to liquidation mode as with a shot of rain before the heat, most think the crop will not be damaged.

A sharply higher US dollar did not help as the dollar traded to highs not seen since November 2002. The strong dollar hit the Kansas City and Minneapolis wheat the hardest as those two markets saw a 93-cent trading range. The corn and soybean rally was enough to bring both markets within reach of their 50% retracement level from recent high and low.

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Monday’s Crop Progress report was friendly to the grains, but once again, recession fears and fund long liquidation made it hard to truly appreciate the friendly Crop Progress report.

The report continues to show a crop rated below expectations and one that is slowly advancing in crop development. As of Sunday, corn silking was 10% behind average and corn’s crop condition rating was unchanged at 64% good/excellent, which was lower than expected. Conditions did stabilize in the eastern Corn Belt. Soybeans in bloom are 6% behind average. Like corn, soybeans crop condition rating dropped 1% to 62% good/excellent, 2% lower than expected. And like corn, the eastern Corn Belt conditions stabilized. Minnesota seemed to be the state with the biggest issue this week as corn conditions dropped 2% while soybean conditions slipped 5%.

Winter wheat harvest continues to run slower than expected. As of Sunday, 63% of the nation’s winter wheat crop was in the bin, 5% less than expected. But that was offset by a much better than expected spring wheat condition rating. Spring wheat improved 4% to 70% good/excellent last week. But spring wheat heading is drastically behind average as only 44% of the nation’s crop has headed out versus 77% average.

The U.S. Department of Agriculture’s July Crop Production report was released Tuesday, July 12. The uneventfulness of the report combined with the increase for rain chances later in the week resulted in a wash out in the grains.

For wheat, USDA made only minor changes to the old crop numbers decreased seed demand 4 million bushels and decreased exports 1 million bushels. That increased ending stocks by 5 million bushels which resulted in a 7 cent drop in the national average price.

For new crop wheat, USDA made a few more adjustments. Planted acreage dropped 200,000 acres. Harvested acreage increased 500,000 acres mostly due to an increase of 300,000 acres in Oklahoma. Kansas is expected to harvest 100,000 fewer wheat acres. USDA also increased the average wheat yield 0.4 bushels. The biggest change came in North Dakota where the average winter wheat yield increased 11 bushels per acre from June’s estimate to a new all-time record yield of 58 bushels. Not to be left out, North Dakota’s spring wheat yield increased 18 bushels from last month to a new record high of 51 bushels.

The net result in the acreage and yield changes put wheat production at 1.781 billion bushels, 44 million bushels above last month and 34 million bushels above expectations. But that increased production was offset by a 10 million bushel decrease in wheat imports, a 2 million bushels increase in seed demand, and a 25 million bushel increase in wheat exports. The net result put wheat ending stocks at 639 million bushels, 12 million bushels above last month, but 2 million bushels below expectations. Once again, the national average price dropped 25 cents to $10.50.

The report was a little more negative corn. USDA made only one adjustment to the old crop corn numbers. USDA decreased old crop corn feed demand by 25 million bushels which followed through to increase old crop stocks by the same, putting stocks at 1.51 billion bushels, 24 million bushels above expectations.

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This followed through to increase beginning stocks in new crop. The only other adjustment to new crop corn estimates was a 45 million bushels increase in production, now estimated at 14.505 billion bushels, 19 million bushels less than expected. The production increase came from a 400,000 acre increase in planted acreage and a 200,000 acre increase in harvested acreage. The net change put ending stocks at 1.47 billion bushels, 70 million bushels above last month and 42 million bushels above expectations. The national average price dropped 10 cents to $6.65.

The soybean estimate was neutral as USDA was slightly conservative on their numbers. The only adjustment USDA made to old crop was a 10 million bushel decrease in crush, which increased ending stocks by the same, putting them at 215 million bushels, 5 million bushels above expectations.

As expected, USDA did lower new crop soybean planted acreage 2.7 million and harvested acreage by 2.6 million acres, which in turn put production at 4.505 billion bushels, 135 million bushels below last month and 31 million bushels below expectations. But USDA was not done cutting yet. On the demand side, USDA trimmed crush 10 million bushels and exports by 65 million bushels, which was a surprise. The 75 million bushel cut in demand took the edge off the large production decrease. The net result put stocks at 230 million bushels, 50 million bushels below last month but 20 million bushels above expectations. The national average price dropped 30 cents to $14.40.

But instead of digesting all that, the trade focused on the weather forecast, which showed a slight change of rain in the six-to-10-day forecast (which has since been downgraded). The market was also under the influence of recession talk as that seems to be dominating the stock market world right now. A sharply lower crude oil market, higher U.S. dollar, and another round of lockdowns in China did not help.

The market is officially in a weather market so be prepared for things to get wild.

After ending the first week of July on a lower note, cattle have seen strong buying develop at the start of the second week of July. Live cattle’s gains have been tempered by the lack of a cash trade, but the feeder cattle have recovered almost two-thirds of their recent losses.

Producers with unhedged spring calves should start to look at hedging their calves. Numbers are expected to be lower this fall, but cattle seem to be a little more connected to the stock market than I’m comfortable with.

“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.”

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