Market Thoughts 07.25.21
September corn lost 8’6 to finish the week at 547’2 but did manage to trade up to 579 on Wednesday, highest level since June 2nd, before sharp losses to close out the week. Similar story for beans with the August contract trading to 1480 on Sunday night, its highest level since June 14th, and then proceeding to lose 79 cents and close at 1401’0. Spring wheat gapped higher on Sunday night to a new contract high at 944’4 before losing 61 cents to end at 883’4.
Our theory from last week that ND/Canada weather would support things “at least a little while longer” was technically correct I guess since grains traded higher the first six hours of Sunday night before posting losses the rest of the week. Going forward it’s still pretty simple - the bullish case rests on the northern weather situation and potential August weather risk for beans across all of the Corn Belt given incredibly tight carryout projections. On the bearish side, stuff is starting to mount. Private corn yield estimates are already coming in above trend, weather remains mostly good for most of the Corn Belt, export sales have been abysmal the last several weeks, and now outside markets are a concern with crude oil falling 10% last week, the dollar index reaching its highest level since late March, delta-variant Covid spiking and the Consumer Price Index registering its highest reading since 2008 (just before the Great Recession. Add to it the seasonal time of year and it’s going to be tough to keep grains from sliding lower.
There are four analog years where corn had tight old crop carryouts with a good crop in the field as of late July – 1996, 2008, 2011 and 2013. We talked last week about 1996 and 2013 and the analog to 2021 with a huge inverse when July futures rolled off the board. It’s useful to look at all four years:
All four analog years ended up sharply lower at harvest from late-July price levels. Only 2011 saw a rally post-July, moving higher in August due to very hot/dry conditions during the month (flash drought), something that could conceivably still happen this year. But even in 2011, futures then fell 200 cents into harvest after the August rally.
We don’t spend enough time on this perhaps, but the Dollar Index is arguably the biggest single factor influencing grain prices right now. (Corn and the DX have a -.79 correlation over the last five years, by far the highest correlation/reverse correlation of any one factor to grains.) Anyhow, it is critical to watch what happens next with the DX as it has stalled out for now just below the March 31st highs.
Revisiting our June 6th comments on spring wheat:
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.
The price action this week coupled with our Algos (Strong Sell Signal on Friday) supports the idea that spring wheat futures have peaked. Harvest is just getting started and yields relative to expectations will ultimately determine what happens next. But if row crops are trending lower and the market has priced in worst-case yields ahead of harvest (as is typical for a drought), then it would be tough to rally back and take out those 944 highs from Sunday night.