Market Thoughts 01.17.21
March corn gained 35’2 to close at 531’4, the highest weekly close for that commodity since July 2013. Corn was locked limit up following Tuesday’s report, gapped higher on Wednesday evening and posted a contract high of 541’4 before fading to close out the week. March beans gained 42 cents to close at 1416’6, impressive enough but less so considering corn’s advance. Beans closed well off 1436 highs Wednesday night but still managed their highest weekly close since July 2014. Spring wheat is finally starting to get its act together as March futures added 35’2 to close at 643’2, highest since May 2018.
USDA Report Summary:
Once again the USDA didn’t disappoint. Wheat and beans were basically neutral, with all key metrics – quarterly stocks, production, carryout, world carryout – in line with pre-report estimates. A “neutral” report for beans is still bullish though given current 140 million bushel carryout projection and an export pace that suggests it could be even lower.
But once again, wild stuff for corn. Dec 1 corn stocks came in over 600 million bushels below the average trade guess and 270 million below the lowest individual trade guess. Yield was lowered 3.8 bushels per acre and production off 325 million bushels, both well below the lowest of trade guesses and by far the largest change in the Jan S&D in years.
Corn carryout is now estimated at 1.552 billion bushels, down nearly 1.8 billion bushels from its peak in June, with virtually the entire change coming from USDA revisions to supply.
Worth noting, ND Dec 1 corn stocks are down almost 40% from a year ago and not adequate to supply corn needs in-state until harvest without rationing or importing…We’ve known this certainly but it’s still jarring to see it in print.
Something appears broken here as the USDA has made massive revisions to already-released quarterly stocks data in four of the last five stocks updates. Prior to that, there had only been one adjustment greater than 25 million bushels over the previous decade. This continues to make risk management difficult for all market participants; in 2020 the USDA almost single-handedly re-wrote the entire fundamental narrative by making major revisions to data they had already released.
The fundamental case for grains remains strong as there was plenty of fresh bullish news this week. In addition to Tuesday’s corn #s, Russia said it will likely increase/expedite wheat export taxes planned for next month as Putin is reportedly frustrated that domestic food prices remain too high. And incredibly, the U.S. continues to sell old crop beans with large volumes showing up again in this week’s export sales report. South American weather is ok with generally enough just in time rains but the Argentine crop is rated very poor and the two week forecast remains too dry for most of the continent. Supply chain fears (like the Argentine strike) and food security fears (Russian export tax) persist and the dollar, already sliding to multi-year lows, appears to be vulnerable given the latest stimulus talks. To recap – U.S. rationing beans, U.S. corn still cheapest in the world, supply chain/food security fears, dollar sliding/inflation and lingering weather issues. There seems to be enough fundamentally to keep things firm for a while without a major fresh bearish catalyst.
The algo/technicals case is telling a slightly different story. All three commodities are now in sell signal territory with corn and beans declining from recent peak signals on Wednesday. RSI is incredibly overbought and showing bearish divergence/crossing over; this has been a timely indicator of the previous two bean corrections. Also of note, national corn basis backed off sharply after Tuesday’s move and futures spreads widened out, both bearish signs. Lastly, it’s troubling that beans didn’t perform any better than they did this week as the fundamental news seemed strong enough to make a bigger advance.
So what now? The fundamental case remains bullish while tech/algos/basis/spreads saying sell, the seasonal comparison to 2010/11 is still tracking incredibly close, prices are at great levels but new crop at a steep inverse (much lower) than old crop…
It’s worth noting again why we lean into put options at a time like this (for new crop hedging). Below is Nov 2021 futures and two recent analog years with tight carryouts, high futures prices and steep inverses going into the spring. 2011 saw production issues/slightly reduced yields and Nov beans kept rising all through the summer. 2014 was the exact opposite; Nov beans peaked near 1300 in May and fell all the way below 900 by harvest as ideal growing conditions lead to massive crops.