Market Thoughts 02.14.21
***What Matters When You Market II – Reminder to Save the Date, June 24th, 2021 – Knight’s Lodge, Riverdale, ND***
***Lighthouse Labs Algo Update will be sent out shortly***
Dec corn lost 9’6 to finish at 538’6 after volatile trading that saw futures post a new high of 574’2 ahead of Tuesday’s report before promptly falling 50 cents in its wake to 524’6 and then rebounding slightly to finish out the week. March soybeans gained 5’2 to close at 1372 on the week. This was right in the middle of a 73 cent trading range that saw a high of 1409’4 ahead of the report and a low of 1337’2 early on Thursday. March spring wheat lost 10 cents to close at 616’0. That contract touched 638 on Tuesday, matching its high from the week prior, but unlike corn and beans was unable to recoup any post-report losses and closed the week just above its daily low of 614’2.
Tuesday’s USDA Report:
Soybean carryout was reduced by 20 to 120 million bushels and stocks/use just 2.6%, an incredibly tight level but in line with pre-report estimates. World bean carryout came in just above pre-report estimates but similarly represents a very tight stocks/use ratio.
Wheat numbers were mostly neutral but it is worth noting, spring wheat carryout was ratcheted down 20 million bushels alongside increased exports, a substantial change. This continues to set the stage for a potential spring wheat rally this summer. Smaller carryout, strong export demand through the summer, substantially reduced acres; all that’s needed is a credible weather threat during the growing season.
Corn ran into some trouble though... Corn carryout was reduced to 1.502 billion bushels after a 50 million bushel increase to exports. However, trade was looking for something closer to 200 million bushels increased exports and a sub 1.4 bln bushel carryout. Equally troubling was an increase in projected world corn ending stocks, a number nearly 7 mmt higher than the trade had guessed. The USDA essentially signaled in this report they’re not likely to ramp U.S. export numbers up high enough to have demand alone support a price move above current levels. And simultaneously they indicated high prices are having an effect on global demand, causing much more feed wheat to be used, etc. Add to this a small export cancellation from Japan on Wednesday morning and you have the catalysts for a 50 cent route as the late/weak spec long expecting a quick move to 700 was fairly easy to flush out on this news.
Corn Stocks/Use vs Price scatter chart reprinted with permission from Matt Campbell, StoneX
Corn has conformed very well to a trend line on price relative to stocks/use the past several years. With that, corn trading ~575 suggested pricing in something closer to an 8% stocks/use. That would require an additional ~350 million bushels of exports (on top of the 2.6 billion already forecast), an outcome that seems less likely following Tuesday’s report. Current 10% stock/use would suggest prices ~4.50. Also pointed out by Campbell is the extraordinary challenge of shipping the nearly 3 billion bushels of corn exports it would take to get in range of an 8% stocks/use. To do so we would have to average 74 million bushels of weekly shipments for the balance of the year. We’ve only had two weeks this decade that have been above 70 million bushels. This is not impossible as the capacity is there and the bean program will essentially go to 0 shortly, there just isn’t a precedent for this level of sustained shipments.
The conclusion would seem to be current price levels and extreme inverses are perhaps enough until we have a weather threat this summer?
Strangely, beans have consolidated for the past month with all but two daily closes coming in a 50 cent range between 1342 and 1392. There should be ammo to press higher with just a 2.6% stocks/use ratio, Brazilian harvest pace slowest in a decade and no export cancellations yet. Further, several private acreage estimates are all pegging beans around 90 million acres; not enough to prop up balance sheets or allow any margin for weather issues.