Market Thoughts 02.06.22
***Week-ending Price Signals report and analysis to be sent out shortly***
March corn actually lost 15’4 last week to close at 620’4, though it did oblige us and make new contract highs at 642’4 on Monday before collapsing in the wake of another brutal weekly ethanol report. March soybeans added an incredible 83’4 cents, closing at 1553’4. For what it’s worth, this is by far the highest price ever for March beans in the months leading up to expiration and apart from a brief stretch in summer 2012, is the highest price period for the March contract. Spring wheat managed to outperform corn last week by only losing 7 cents to end the week at 913’0. March wheat has now lost money five of the past six weeks and remains far below its November highs.
Here’s what we had to say about corn/bean markets back on December 11th:
The grain bull story remains intact – record fertilizer prices/possible shortages/40-year inflation highs is enough to hold the large speculator’s attention. Corn has been and likely continues to be the biggest beneficiary while all ag commodities benefit somewhat. Alongside that, beans posted their highest close since September this week after completing a near perfect reverse head and shoulders (bullish) pattern. It’s going to take something substantially negative this winter/ spring to get Managed Money to give up early on the fertilizer/inflation story. And likewise, it seems only a modest additional bullish catalyst – perhaps SA dryness expands beyond eastern Arg/southern BZL –and corn/beans tack on another leg higher.
In the three months that have passed, we’ve used our market commentary to regularly reinforce that bullish theme while corn rallied 60 cents and beans over 300 cents. For the first time in a while though caution is warranted.
There are several things that give our previously unfettered bullishness pause this week but first is simply just the extreme price levels beans are at. We noted the historic nature of March bean prices – November is in a similar spot:
There are only four other years that even approach these price levels – last year and the 2011-2013 stretch. Only 2012 saw beans expire higher than today’s values and only 2021 saw beans continue to rally through winter/spring, the other three years featured sideways trade from now into summer.
More troubling is the two main demand markets that drive row crops. We’re surprised this didn’t get more of a market response but the weekly export report showed China with a small net cancellation on beans even with several daily announced purchases prior in the week. China also reported a relatively large corn cancellation. And similarly, ethanol stocks have exploded the last two weeks with inventory now nearly matching levels reached at the height of the pandemic in spring 2020. That’s not what you want to see if you’re a bull – recall that when stocks hit those levels in spring 2020, nearly 40% of ethanol production was idled in its wake (and corn fell briefly below 3.00)…Also, as the bean market has rallied, basis has steadily collapsed. Marketing 101 says that’s also not what you want to see – healthy bull markets should be led by cash/strong basis. And if we need a reminder, spring wheat just went through this exact scenario – futures rallied to ten year highs while basis backed off nearly 50 cents and then futures prices collapsed. Lastly, it’s been weird how the market traded South American weather risk. We’ve been adding weather premium the last two weeks based off analysts racing to reduce crop size estimates after the fact as weather is largely non-threatening now. In any event, the market should be about done trading reduced South American crop size estimates.
It’s always about probability with us, what’s most probable to happen next. We’ve enjoyed being bullish for three months and even today we don’t dispute the longer term bullish stories are still intact (input issues, RVO, inflation). The potential remains for a major summer rally with a weather catalyst and never assume managed money can’t keep a soybean rally going far longer than anyone expected. That said, it’s certainly most probable today that prices cool off for a while given all that we noted above.