Market Thoughts 07.18.21
September corn gained 26’4 to end the week at 556’0 but finished poorly with two days of losses after hitting 572 on Wednesday. August beans gained 75’4 to close the week at 1454’6, the best weekly showing for that contract since early June. September spring wheat exploded following Monday’s WASDE report, adding 103’0 cents to close at 917’2, the highest weekly close for spring wheat since late 2012.
Things seem as clear right now as they’ve been in a while; what happens next boils down to which of two things is more important over the next 60 days, Canadian Canola/ND situation or 85% of the corn belt pairing perfect weather with 2021 corn/bean genetics. One prominent weather group recently suggested it’s now nearly certain corn yields are above trend with upcoming weather simply determining by how much. On the other hand, the Canadian canola crop (along with all other crops) is being ravaged along with North Dakota/NW Corn Belt issues and oilseed balance sheets have no margin for error. So what happens next:
Monday’s July WASDE report was mostly in line with expectations for corn and beans but contained a massive bullish surprise for spring wheat as the USDA pegged spring wheat production at just 305 million bushels, an incredible 150 million below the average trade guess. (This would be the equivalent of missing the corn production number by 5 billion bushels…) We discussed internally how ridiculous the pre-report guess was and we don’t suspect traders actively involved in spring wheat markets were thinking the crop was 456 million bushels:
That said, even our more realistic production estimates weren’t as low as 305 million bushels, the smallest spring wheat crop since 1988.
A couple months ago we suggested the spring wheat rally would peak in late June/early July and likely be in the 900-950 area. Two weeks ago we thought it may have peaked, an idea that seemed reasonable when futures promptly dropped 80 cents after we suggested it. But the USDA report meant quickly pricing in this new supply information. We’re now in the middle of our original price target range after having five sessions to trade the USDA data (and this miserable forecast).
Corn/beans put in a fairly impressive performance last week, shrugging off continued bearish weather and slightly bearish WASDE news to close sharply higher on the week while easily holding above the May lows. But there are definitely warning signs right now, particularly with corn. July corn expired on the 14th at 683, leaving a 119 cent gap on the continuous chart when the September contract took over. There’s only been two other years, 1996 and 2013, with this kind of premium to September at July expiration and both years saw corn futures continue to fall all the way into harvest while not returning to those prior price levels for several years. September marks the transition from old to new crop and a huge discount to July reflects a market that isn’t worried at all about new crop supplies. (By contrast both 2011 and 2012 had sub-10% old crop stocks/use but July futures expired with only small premiums to September due to major concerns about new crop stocks/use in those years.) Two analog years is a really small sample size but it does suggest corn wants to head lower. Thurs/Fri trade was really concerning along these lines as corn needs to quickly start trading higher again to buck the trend.
Maybe it’s a reflection of how intimate we are with our own backyard but our expectation is that the Canola/ND situation keeps supporting corn/beans for a little while longer. But it’s worth noting again drought rallies, even extreme ones such as this, overwhelmingly tend to top out well ahead of harvest. (2012, on the Mount Rushmore of droughts, saw corn peak in early August and fall 150 cents into harvest.)
What’s happening in Canola is truly unprecedented. Wheat is rallying with a 50% old crop stock/use; canola on the other hand had to ration demand in 2020/201 and was forecasting impossibly tight carryouts even with normal yields in 2021. The dip in the chart in mid-June was just before condition ratings started to tank. Canola was still worth 24 cents even when the crop was still on track to be normal. How high is high enough if yields are 30% below normal?