Market Thoughts 06.06.21
***What Matters When You Market II – June 24th, 2021 – Knight’s Lodge, Riverdale, ND***
***Lighthouse Labs Algo Update will be sent out shortly***
Less than three weeks until our June 24th meeting with topics that include a market outlook, crop insurance discussion, voluntary carbon markets/Lighthouse sustainability project and panel discussion on farm finances. Will be a great networking event with farmers from across the Dakotas and meal/social to follow.
July corn added 26 cents to close at 682’6 on the week. This week’s action saw futures trade up to 696’6 on Tuesday, a rally of 94 cents in just four sessions, and in the process fill the gap on the continuous chart at 685 that we had been expecting. July beans gained 53’2 to finish the week at 1583’6. July spring wheat tacked on 85’2 cents to close at 812’6 after gapping sharply higher to open the week Monday night. Spring wheat futures have now rallied 144 cents in just six trading sessions, with Friday’s move taking out the May 7th highs. Nearby spring wheat futures are now above 2017 highs and at highest levels since April 2013.
Corn/Bean planting is winding down, with the fast pace noted two weeks ago strongly correlated with good yields (with 2012 as the one extreme outlier…). Corn’s initial condition ratings showed 76% good/excellent. Basis is starting to collapse into the inverse with old crop bean basis off 80-100 cents from early May highs after processors rolled bids to August and backed off posted values. Corn bids are slowing starting to do the same and South American corn/bean offers continue to be much cheaper than U.S.. There’s an S&D report this week but looming much larger is the June 30th final acres report that is expected to show sharp increases from intended corn acres.
We noted two weeks ago it was very unlikely grains would continue their recent slide and was also high probable corn would fill the 685 chart gap. Now that both of those have occurred, what next? One thing to remind – U.S. weather is by far the biggest driver of the markets right now and it will be wildly volatile. Thursday/Friday offered a great illustration of this as Thursday’s wetter forecast sent futures scrambling only to have those losses erased by drier model runs on Friday. Hot/dry weather the next two weeks across problem areas of the NW Corn Belt should keep a bid under grains leading up to the June 30th reports. And while we thought it unlikely two weeks ago that the May 7th corn/bean highs get taken out, it at least seems somewhat probable now. That said, longer term summer forecasts still look fairly average/neutral to us and we continue to think it most probable that grains make a high in June (whether it is above the May 7th highs or not) and slide lower into harvest, noting again the strong historical precedent for this occurring in years similar to 2021.
Spring wheat continues to deteriorate into something most of us have never seen before, with condition ratings overall the worst they’ve been since 1988 and likely falling sharply in Monday’s update. Given that many of our clients have their worst wheat crop ever, it’s tough not to be runaway bullish. The market doesn’t seem to grasp the extent of the spring wheat production issues and seems to be completely oblivious to all the intended acres that were switched out of wheat or abandoned, that will show up in June 30th report. With all this, it’s helpful to look at seasonal comparison from two similar drought years, 2017 and 1988, and point out a few things:
o All three years featured breakout higher gaps in early June – 6/6 in 1988, 6/12 in 2017 and 6/1 in 2021.
o 2017 and 1988 both featured major highs well ahead of harvest – early July in 2017 and late June in 1988. In 2017, weather conditions improved and the crop ended up much bigger than was feared. 1988 however was a near-total crop failure but with massive U.S. wheat stocks the market still posted a peak well ahead of harvest.
o At its peak in 2017, July spring wheat was trading at 207% of the price of corn. The 1988 peak was at 130% of the price of corn. Conceding the 1988 comparison is more similar to this year for both corn and wheat, it would suggest wheat futures closer to 950.
o Both 2017 and 1988 rallied ~45% after breaking out from lengthy periods of price consolidation in the winter/early spring. A similar rally for 2021 wheat after consolidating around 650 this winter would suggest a price target around 940.
o Distilling all this into a conclusion – it seems probable that spring wheat posts a high in late June/early July somewhere around 950. As with all things here, this is not a prediction but an estimate of what’s most probable given comparisons to the two most similar drought years.