This is my 19th summer trading grain and I can truly say battling with the emotions of a weather market never gets easier.
While I can’t with 100% certainty say this year’s weather market is over considering extended weather forecasts have been less than reliable, I can say with confidence that the levels we touched this past week in grains will prove to be lofty targets here on out, if rains continue as models indicate.
In my April 30th Sunday Scaries column I discussed the weather rallies we have seen over the last 10 years in corn. While I was fully expecting to see a rally from the lows we had put in place in the middle of May, the recent move we experienced was more violent than I had anticipated, leaving many to wonder what’s next.
To figure out where we are heading though, I think it is best to look at what--if anything--has changed over the last month and what could change in the month ahead.
Wheat
Wheat never really gets to go first in any sort of market analysis, so I figure it is time to let it shine.
Wheat is a tough market to pick apart for many reasons, one of the biggest being it is the Russian Nesting Doll of commodities. Under the umbrella of wheat, you have several different types or classes, all of which trade their own unique set of fundamentals.
This week we heard of worries over spring wheat production potential both in the US and Russia. Spring wheat in Russia is a small percentage of what they produce, as most of their wheat is planted in the fall and harvested over the next handful of weeks, like the wheat in the Southern Plains of the US, and much of the Eastern Corn Belt. The majority of US spring wheat is planted in the Northern Plains.
In addition to talk of potential production reductions in spring wheat, talk of dry weather curtailing production across much of Europe surfaced as well.
These production concerns came quickly on the heels of news China had somewhere between 20 and 30 million metric tons (735 million to 1.1 billion bushels) of wheat damaged by heavy rains across the heart of its major wheat producing region just ahead of harvest.
All of this with news the Black Sea Grain corridor deal will likely soon come to an end and funds who were perhaps caught leaning too short a little too early has spurred a nice rally in wheat from its lows. Chicago wheat rallied $1.58 from its May 31 lows to last week’s highs and is still sitting $1.44 higher.
While the headlines seem intimidating, the physical market remains somewhat unfazed, with world end users able to access supplies that are still much cheaper than they were a year ago.
The China situation will be interesting to watch, as that is a significant amount of production to have downgraded. However, the government was very quick to set up offloading sites for the wheat of poor quality, and is now working on ways to either use it for feed in the country or export it to neighboring nations. Chinese wheat imports have already been incredibly strong to start the year, with a significant amount of Australian wheat purchased and talk import deals with Russian suppliers are still being negotiated.
The bottom line in wheat currently is that the overall global supply is adequate, with potential issues over shortages being more class driven and likely solved by basis and spread action in each market.
Soybeans
While I was optimistic the market would rally hard off lows, the run higher staged by November soybeans far exceeded my expectations. From May 31 to Wednesday, November beans marched nearly $2.50 higher, on the back of poor weather and thoughts we will see increases in Chinese demand thanks to government stimulus.
The poor weather is a reality, with crop conditions sitting at their lowest level since 1992. Here in Michigan, we have experienced our driest start to the growing season in 131 years, with some beans not even having enough moisture to emerge.
While a lot of folks will tell you beans like it a little rough to start the season, this may prove to be a bit too much, taking the top end off from production. In soybeans a bushel per acre nationally results in an 87 million bushel swing in ending stocks or nearly 25% of the current projected carryout making yield adjustments that much more important.
However, much like what we will talk about in corn, potential reductions to the export outlook may be able to offset a portion of production losses. Speaking of the export outlook, optimism China stimulus results in a big increase in bean demand is somewhat questionable. I’m not bearish Chinese soybean demand, but I’m not expecting major increases from current USDA expectations. The USDA already has Chinese new crop soybean imports at 100 million metric tons, in line with 2020/21 imports—a year that was marked by a big jump in purchases after the trade war had depleted stocks.
In the end, much like in wheat the world end user is watching the situation closely but remains mostly unengaged as supplies continue to feel adequate and cash values remain somewhat steady even in the face of a board rally.
Corn
The rally in corn from mid-May lows to Wednesday highs is one of the biggest we’ve seen from both percentage and a purely monetary standpoint over the last 10 years. From May 18th to June 21st December corn added $1.38, trading again to crop insurance guarantee levels and then some, something I wasn’t sure would happen this year.
As I wrote in my June 11th article, barring a major surprise in Friday’s numbers when it comes to quarterly stocks or acres, there is some room for error on the production side. As outlined in the different supply and demand projections presented in the article, new crop demand is likely overstated by as much as 800 million bushels, with thoughts we could see 150-200 million bushels worth of old crop demand adjustments yet to come.
Of course, the poor start to the crop has taken off the top end of yield potential, but this week’s price levels were easily trading a sub 170 crop, one that would be worse than last year and a drop on the back of June weather that would be somewhat unprecedented. Without rain moving forward of course, the risk of big-time yield reductions remains present, but it would take a continuation of dryness into July and August as we saw in 2012 to make it so.
Many experts feel the potential remains to produce a 175-177 bushel per acre crop nationally, if the weather were to normalize in the weeks ahead. This weekend’s rain event has been considered critical, and while some areas that are dry have unfortunately been missed, the moisture that has fallen will go far to get us to the next rain event. As it stands currently, we are unlikely to bust the drought any time soon, but a return to more normalized rainfall as we move into July, so long as it continues into August, keeps the potential for an average crop in play.
In the end, as with everything else, the world end user remains unfazed by the recent rise in price, as supplies feel adequate enough in the short term to keep them from panicking. A change in that attitude could create an interesting market response, but with a record Safrinha crop just getting ready to be harvested in Brazil, it is unlikely physical supplies will feel exceptionally short any time soon.
Wrapping it all up, while weather remains the driver, the calendar is no longer on our side. The need to maintain a risk premium after the poor start to the production season will likely keep us supported until we become more confident the weather pattern has indeed changed, but the need to move to new highs has likely been tempered.
As always, don’t hesitate to reach out with any questions. Have a great week!
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
