Market Thoughts 10.11.20
Dec corn exploded higher again this week, adding 15’2 to close at 395’0 while briefly reaching as high as 398’2 in the aftermath of Friday’s USDA report. Incredibly, corn has not traded this high in October since 2013 while this is the highest price for the Dec 20 contract since January 13th. Nov beans added 44’6 to close at a new contract high of 1065’4, the highest bean futures have traded in over four years. Dec spring wheat managed to add 12’0 cents to end at 543’6 but closed well off weekly highs of 555’0.
Friday’s UDSA report was friendly with bean carryout coming in well below average trade guesses. Wheat and corn were both in line with guesses but well below month-ago estimates.
Setting the stage for Friday was a September 30th Stocks report that basically revealed everything the USDA indicated about production for the past 15 months was wrong. In it, we found the largest combined decline ever of corn/bean/wheat stocks, nearly 400 million bushels below trade estimates. Add to that some further acres declines in this month’s WASDE and June’s corn carryout estimate of 3.323 billion bushels has now tumbled 1.156 billion bushels, and this despite no major weather/supply issue with a record 178.4 yield.
This has not been a particularly memorable stretch for Market Thoughts, including one such instance a couple weeks ago when we laid out in detail the observation of a high-probability soybean sell signal. It’s worth noting that beans did in fact fall nearly 60 cents in the aftermath of that signal and following the most shockingly bullish stocks report ever it still took six sessions for them to make new contract highs. We revisit that for two reasons here, first to reinforce that such signals are quite reliable as there will come a time to pay attention to one again. And second, to say that it’s worth understanding what trumped the signal this time:
Forgetting what we thought we knew prior and looking at things as they stand today:
Corn Stocks/Use is now at the low end of levels seen the past five years while bean stocks/use at just 6.4% is incredibly tight. Both of these declines occurred without a major supply issue during the growing season. On that note though, the flash drought and derecho clipped the top end off yields and it’s highly unlikely yields get revised higher from Friday’s number. Futures have rallied continuously despite/through the rapid harvest of a large corn/bean crop, something we’ve only seen twice in the last twenty years. And there is a demand story underpinning this that will likely not fade despite price rallies. Chinese export demand and whispers/possibilities of a much bigger food security issue is the sort of strong demand catalyst we haven’t seen in some time. The demand story has been here for a while, add to it now much smaller U.S. Stocks and suddenly there’s not much room for error with the South American crop. On that note, a strong La Nina and very dry/slow start to Brazilian soybean planting has traders nervous and grains basically back in a weather market even as the U.S. harvest climbs past its halfway point. There are a few observations here that wouldn’t have made any sense a month ago but now seem most probable:
Friday’s stocks/use levels suggest corn and beans are toward the high end of trading ranges but not that overvalued. And there is substantial room for more spec long to come into corn yet.
With all of this, it would be incredibly unlikely for row crops to not trade meaningfully higher than their harvest levels during the subsequent winter.
We say this cautiously but there is one year that stands out as an analog to 2020 after all we’ve learned recently – 2010. 2010 saw corn prices cheap as the crop got off to a great start with an abundance of poor quality old crop supplies. Then an August flash drought dropped yields and problems with Russian wheat added more support while ethanol demand was largely unrationable due to the RFS2 mandate. As we’ve noted above, 2020 is similar in most respects with China replacing ethanol as the demand bull story.
Looking at the seasonal similarities there are two things to focus on:
Demand bull markets that rally through harvest usually go beyond harvest for quite a ways.
This is not a prediction for 2020 prices to reach 2010 levels; 2010 corn carryout was much tighter than 2020 and yield fell way further. Rather, this is just an idea of the trend to expect given a year with similar circumstances.
2010 and 2020 corn and beans were at virtually identical prices in early July before mounting rallies that extended through harvest. The 2010 rally continued well beyond harvest…