Market Thoughts 11.20.22
Dec corn gained 9’6 to finish the week at 667’6. Tuesday was a busy day for that contract, making a new recent low at 651’2 in the morning and then rallying to a weekly high of 675’0 just before the close. Jan beans lost 21’6 to close at 1428’2, posting a second straight weekly loss. Dec spring wheat gained 5’6 to end at 951’4 but closed more than 30 cents off a brief 982’6 high on Tuesday.
Another interesting week of grain trading…With our post-harvest soybean rally having occurred and long-expected 50 cent break in corn prices finally happening, markets seemed ready to oblige our next idea, of sideways/lower trade this winter. Seasonal comparisons to the few years that are analogous to this year – tight carryouts/high harvest prices/etc. – do not feature major futures price rallies in the winter following harvest. Instead, basis and spreads do the work as futures trade sideways/lower. This allows us to point to a relatively high probability that the bulk of winter trading occurs between 650-700 for corn and 1350-1475ish for beans. But then on Tuesday two missiles land in Poland and confusion sets in. It quickly became apparent Russia wasn’t directly firing at Poland and instead, most likely, fragments of Ukrainian defense missiles were the culprit. And with that clarity, risk premium evaporated as quickly as it appeared, ~30 cents in wheat and ~20 cents added and removed in less than a day. This sort of unforeseen geopolitical development, both bullish and bearish, has been a regular occurrence for the past nearly three years and it makes risk management much more difficult. That said, our opinion on grains remains the same. Shortly after the missile story, Russia agreed to extend the Ukraine export deal another four months. South American production has a long ways to go yet but so far Brazilian weather remains near ideal while Argentine dry areas have shrunk considerably. As we noted last week, the November S&D report makes U.S. 2022 production essentially finalized with no more supply-side fireworks potential for quite some time. Thus it still seems most probable that grains trade sideways/lower through the winter, with recent highs as clear selling opportunities. Tight carryouts and the expanding use of soy oil for biodiesel keep the bottom from falling out and do set the stage for a potential weather rally later. Risk-wise, it becomes a question of how much grain to market at/near recent highs (and historically great prices) versus how much to hold in a zero-carry, high interest rate environment for a potential rally this summer.
Wheat’s five minute chart, shown below, from earlier this week: Futures rallied 20 cents in less than an hour on Tuesday and by Wednesday morning had fallen all the way below Tuesday’s lows.
Week three on this same theme – this time just showing the July-2012 daily corn chart. July - 2012 traded sideways in a roughly 50 cent range from November until mid-May, with subsequent lower highs each time it attempted a rally. The crop was rapidly planted that spring and futures actually fell out the bottom of that range and traded sharply lower before the historic 2012 drought began in early June. The point just being again, that history strongly suggests sideways trade this winter with major rally potential needing help from a weather problem later on.