- USDA reduced its guess on US corn production for the second consecutive month, yet the end result is still a near-record large crop at a time of reduced demand.
- USDA also reduced US soybean production, despite near ideal weather since mid-July and memories of what happened in Brail this past January and February still fresh in our minds.
- It didn't matter what USDA had to say about US wheat, the Chicago (SRW) market is that fundamentally bearish.
The first thing that came to my mind as I watched the grain and oilseed sector close Friday was the famous line from Scottish poet Robert Burns, “The best laid schemes o' Mice an' Men,/Gang aft agley./An' lea'e us nought but grief an' pain,/For promis'd joy!”
The grain and oilseed sector grew interesting immediately following the release of USDA’s August supply and demand guesses. First, a tip of the hat to USDA for taking its best shot at sparking a buying frenzy with solidly reduced US 2023 production numbers for both corn and soybeans. Initially the ploy seemed to work as both December corn and November soybeans rallied. But what really got my attention is the rally did not occur on big trade volume. This told me the buying was coming from small mom and pop traders, likely on the advice of folks who view the Vegas game Keno[i] as a get-rich scheme. After both contracts burned through the initial orders, Watson[ii] stepped back in as a seller. In a big way. By the time the closing bell rang trade volume in Dec corn had skyrocketed to nearly 242,000 contracts. Why? Recall grain and oilseed markets are weather derivatives, and as we head into the weekend forecasts look favorable across much of the US Plains and Midwest. As for Chicago (SRW), it was fundamentally ugly bearish going into Friday’s session and even more so at the close. Now we’ll sit and wait to see what happens with basis markets Friday afternoon and evening.
Corn: As I mentioned, Watson clobbered the corn market the last couple hours of Friday’s session. But before we get there, let’s revisit what I talked about this morning. The Dec23 futures contract (ZCZ23) was priced roughly $1.00 below the US spring guaranteed price of $5.91. This provided the incentive for USDA to reduce US production in its August report and place the blame on US producers who turned in the surveys. I also mentioned a little chart chaos, and Friday delivered on that aspect as well. Heading into the session Dec23 was in a short-term sideways trend on its daily chart between $5.0650 and $4.8925. What did the contract do after USDA’s imaginary numbers were released at noon (ET)? It took out both marks before closing at $4.8725, down 9.0 cents for the day. Where does this leave the contract, technically? As discussed since the end of July, the only price that matters is last month’s low of $4.81. If Dec23 can hold above that mark, then the bullish spike reversal on the long-term monthly chart remains in effect. If it can’t, then the corn market looks destined to stay on the path laid out by its cash index from September 2010 through August 2014.
Soybeans: While I thought going into Friday’s session USDA might wait a month before using its eraser on US soybean production, the powers that be decided to shoot its shot in August. In a way this makes sense, again because the blame can fall on US producers turning in surveys. Action following the report was similar to what was seen in corn, though not to the same degree. November soybeans (ZSX23) initially rallied to a high of $13.38, up 19.75 cents for the day, before falling to a low of $12.9750 and closing at $13.0750. Unlike Dec corn, this didn’t do much on November soybeans’ daily chart other than create a bearish outside range. The key difference between new-crop soybeans and new-crop corn is planted acres. Again, we knew Dec23 corn had done its job of buying away area from Nov23 soybeans the six months from September 2022 through February 2023. This laid the groundwork, literally, for new-crop soybean futures spreads to stay bullish despite the change in weather patterns from La Nina to El Nino. Still, Watson can see the effect a similar pattern change had on the Brazilian crop, all while demand for 2023-2024 US soybeans remains an unknown variable.
Wheat: Chicago wheat is extremely bearish fundamentally. And that, my friends, was how the wheat sector played out Friday. September Chicago (ZWU23) fell as much as 13.5 cents before closing 11.0 cents lower for the day and losing 1.0 cent to December. This had the spread covering 100% calculated full commercial carry and raised the CME’s running average percent of full carry to 85.5%. I think it’s safe to say the commercial storage rate will be increasing on September 19 as there is little chance the running average can be pulled back below 80% over the next two weeks. As they say in the infomercials, though, “But wait, there’s more!”, for the Dec-March futures spread was covering 96% cfcc while the March-May covered 87%. Think of it this way: If you found something like this while on a walk, you’d pick it up in a little bag over your hand and place it in the nearest receptacle. September Kansas City (HRW) closed 11.25 cents lower for the day but gained 2.0 cents on December. On the other hand, Dec lost ground to March which lost ground to May making the market in general look a little less bullish, fundamentally, long-term.
[i] Keno, the game where you pay the House your money, then sit down and wait for the House to tell you if you won. You can guess how it turns out.
[ii] Watson is my name for the algorithm-driven investment side of the markets. This has led to a new school of analysis to go along with technical and fundamental. I don’t have a name for it, yet, but it has to do with figuring out Watson’s next move.
On the date of publication, Darin Newsom 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.
