Market Thoughts 10.25.20
We recently celebrated our five year anniversary and what’s going on as we start year six is unlike anything we’ve seen in the past half decade.
Dec corn closed at 419’2 this week, notching some interesting milestones with it: 17’2 higher, the largest weekly gain of a rally that has seen corn advance nine of the past eleven weeks and now its largest move occurring right during peak harvest activity. 419’2 is by far the highest Dec corn has been in late October since 2013. And, in a nod to never losing sight of seasonals, with last week’s move, corn has now traded above the 417 high from 2017, making it 14 straight years that Dec corn posted a high after April of at least 417. Similar story for beans with a 33’6 cent weekly gain to make new highs at 1083’6. Spring wheat continues to kind of play along with Dec futures closing at 577’4, up 17’6 on the week but well off weekly highs of 587’6 and still not above levels from early January.
A quick recap of what’s different right now in these markets:
With the USDA’s latest carryout projection of 2.167 billion bushels, ~1.2 billion bushels have vanished from 20/21 ending stocks despite only a modest reduction in yield (and yield still estimated at record levels). Dec corn has rallied a dollar in the past eleven weeks and is at its highest October price since 2013 despite rapid harvest of a record yield. Basis is the strongest its been at harvest since 2012 (when we had to ration 2 billion bushels of corn to keep from running out) and futures carry is narrower than even 2012 was in late October.
Bean carryout has tumbled to just 290 million bushels with many private estimates even lower given the continued pace of export sales. Similar to corn, basis is on fire and spreads recently were the narrowest they’ve ever been for this time of year. And despite this, bean processor margins are enormous and export sales continue.
Add to this some legitimate production concerns for the upcoming winter as a strong La Nina affects South America and Russia is in the grips of all-time dryness, along with numerous other minor weather issues across the globe.
Chinese corn prices and Brazilian bean prices are both at record levels. China insists there isn’t a food crisis but they’re increasing corn import quotas and stating they won’t intervene in markets despite record prices.
So what happens next? We think it’s most probable there is another major move higher this winter. We’re fully aware that traditional market metrics would suggest otherwise, especially the amount of managed money net length currently in commodities. But these aren’t normal times and corn still has ~200k contracts of net buying before being “record long”. Beans are much closer to that distinction, within 20k of a record but it’s also worth noting, global bean production is much larger now than when setting the previous record.
The 2010 analog remains compelling. And with it, there’s plenty of anecdotal evidence that corn yield is too high. This isn’t just backyard syndrome, we’ve reviewed thousands of yield reports from all over the country and there aren’t nearly enough “record” yields to justify a new national record. Plus, it’s difficult to put forth a competing theory to explain strong basis/futures rally/spreads collapsing right through harvest.
If we assume markets are correctly pricing known fundamentals on any given day, then our opinion of what happens next is a statement on the probability of various later fundamental developments. To that end, we think it is most probable that U.S. yields are trimmed, La Nina reduces South American bean/safrinha corn production and the Russia situation deteriorates, all while China continuous aggressively buying and the U.S. farmer remains bullish and holds onto a crop tucked away tightly after harvest.