• jcrist18

Market Thoughts 08.29.21

Sep corn gained 19’2 to finish the week at 558’0, recapturing about two-thirds of last week’s 29 cent loss. That contract has closed between 530 and 568 all but two weeks over the past three months, a surprisingly narrow range considering our perception of extreme volatility. Sep soybeans added 65’4 to reclaim most of last week’s losses and finish at 1359’0. Same story for Sep spring wheat, 17’6 higher, erasing a chunk of last week’s red ink and finishing at 936’2. Unlike corn and beans however, spring wheat is still within a few cents of its contract highs and Friday’s close was the second highest close for spring since 2012 (trailing only two Fridays ago.)

The prior week featured a brutal nearly unprecedented barrage of bearish fundamental news for grains with a combination of critical NW Corn Belt rain event, dollar index rallying to highest levels in a year, pro farmer crop tour pegging much larger corn yield than the USDA’s August estimate and finally, the mischaracterized news about proposed slashes to biofuels blending levels. It’s not necessarily shocking that grains collapsed under the weight of that; what is more impressive is how they proceeded to recapture most of those losses this week despite minimal fresh supportive fundamental news.

We pointed a couple weeks ago to the similarities between 2011 and 2021 corn, noting that both years started with tight old crop stocks and then proceeded to have a moderate supply threat lead to a demand-rationing balance sheet by August. There are a few things to know regarding this seasonal through the balance of the crop year:

2011 started the summer very high, dipped to an early July low then rallied into late August. After crop conditions stabilized priced declined sharply into harvest (it’s nearly impossible to have a futures rally in Aug/Sep if the crop is not getting smaller). Futures fell 24% from a 787 peak during that Aug/Sep break in 2011. Prices then traded in a roughly 90 cent range (580-670) the balance of the crop year. It was only once the 2012 drought set in that futures again rallied to new highs.

o 2021 has followed a slightly different pattern, peaking in May and posting three subsequent lower peaks. But if we use the same assumptions/percentages, it suggests a pre-harvest low of 480ish (24% below 639 summer high). This conveniently is right where the gap is at on the Dec chart and has a high probability of filling. From that point, the 2011 comparison would suggest a trading range of 480-570ish for the balance of the year.

o If we agree with the 2011 analog, and it’s tough not to after the 2010 seasonal so closely mirrored 2020 crop year, then March corn should probably be sold above 560.

The Stats Canada crop report (similar to USDA’s WASDE report) is released on Monday at 7:30am and it takes on unprecedented significance this month given the massive drought issues plaguing their wheat and canola crops. Our fundamental opinion is that both the wheat and canola pre-report estimates are too high, setting up for a bullish surprise similar to what happened with spring wheat after the July WASDE. But...our algos are suggesting otherwise as the Canola signal is at its highest level since June and both Canola and Spring Wheat are near outright sell levels while underlying futures prices are also near contract highs (and all-time highs for November Canola futures).

The correlation between US Dollar and grain prices remains incredibly strong; our DX algo hit a sell signal last Friday and the dollar traded lower all week, corresponding nicely with the rally in grains.

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