Market Thoughts 08.15.21
***REMINDER as harvest unfolds that Lighthouse Logistics can manage freight on any grain you have, not just the commodities we market. This year will feature major premiums for shipping specialty commodities to destination markets; let us help you take advantage of opportunities.***
September corn gained 13’2 to finish the week at 568’2, posting its strongest weekly close since June 28th and finally filling the gap left on July 3rd. September beans added 28’6 to 1373’0, the highest weekly close for that contract since July 12th. September spring wheat moved 28’0 higher, making a new contract high at 953 and a new weekly high close at 944’2. This is the highest weekly close since August 2012 for nearby spring wheat and other than during the 07/08 rally, nearby spring wheat has only closed higher than this seven other weeks in history.
Notice again for non-client recipients, we intend to phase out market commentary sometime after the mid-September launch of our Lighthouse Labs website. That launch will bring real-time viewing of signal charts instead of waiting for email updates. Our Lighthouse algos continue to outperform our Lighthouse humans, with highlights including the May 7th highs, the bullish March 31st planting intentions report and now this week’s August WASDE report.
Thursday’s WASDE Report Highlights:
Two major takeaways that will influence prices for several months: First, on corn, the USDA pegged yield at 174.6, nearly 5 bushels below their July estimate and over a bushel below the low end of private estimates. This puts corn already into demand-rationing mode with the USDA cutting exports and ethanol to arrive at a 1.24 bln bu carryout and keep stocks at bare minimum 8.5% stocks/use.
The other major change was to world wheat. The Canadian crop was cut 7.5 mmt and Russian crop 12.5mmt, a combined 20mmt reduction in supply from two of the world’s largest exporters. Bullish enough and then consider, the Canadian crop likely drops much further – private analysts pegging it closer to 16-18mmt. And given the USDA’s tendency make changes slowly, their Russian estimate looks even more bullish. 12.5mmt slashed off that crop was much greater than the trade expected; having us question if the situation is even worse over there.
Stocks/Use for major wheat exporters is now projected to be its tightest since 2007/08 and wheat customers across the world likely haven’t fully absorbed the implications of Thursday’s report. At the same time, U.S. corn is in demand-rationing mode in August of the crop year for only the third time we can recall (2011 and 2012 the others) and there will suddenly be much less wheat to feed. This is the sort of setup that can be explosive, supply shocks the market wasn’t adequately prepared for, and once the size of the Canadian wheat crop is fully revealed the market is likely tasked with rationing both corn and high-protein wheat.
It was about a year ago that we started focusing on the strong seasonal comparison between 2020 and 2010, an analog that tracked tightly through the rest of the crop year. We then suggest earlier this summer that 2021 might in fact be an analog to 2011, something that was met with a fair bit of skepticism. It’s no longer so far-fetched and by comparing the two we can get an idea of what might happen next:
2011 saw an early-summer peak followed by a sideways/lower trade into July before a late-summer flash drought inspired an 160 cent rally to new highs in August, only to fall 200 cents into harvest. This year we peaked much lower but have followed the same pattern. We don’t have a flash drought but instead have the market failing to appreciate the magnitude of problems in the NW Corn Belt and thus a similar yield surprise/sudden need for rationing. Grains should re-price this risk and post a high within the next week or two and then slide into harvest as weather looks favorable and most will expect higher yields in subsequent reports. But given the overall situation, any sort of “harvest low” prices will stay much higher than expected previously and tight carryouts/demand rationing should keep markets on edge through the entire crop year.