Market Thoughts 11.22.20
Dec corn gained 12’6 this week to close at 423’2 after making a new contract high at 428’4 on Wednesday. January beans added another 33 cents to close at 1181’0 beans having now rallied 125 cents in three weeks. Jan hit 1196’6 on Thursday night before selling off sharply to close out the week Friday. Dec spring wheat lost 10’6 to close at 544’0, its lowest close since early October. Spring wheat has now managed to lose 15 cents during the three week period that saw beans rally 125 cents.
Row crops remain in a demand bull market and on the surface all looks well as both corn and beans made new contract highs again this week. The bullish case remains simple (fwiw, major market moves always rest on a simple fundamental premise, one or two drivers.) By far the most import factor is Chinese demand and to date there is no indication their need for our stuff has eased. And with that demand, weather risk is amplified as a large South American crop becomes critical with U.S. bean stocks/use tightest in almost a decade.
While it still seems most probable that grains have not made their highs yet, it is becoming less probable as the weeks go by. A few things to consider:
Again, the single biggest driver of the rally is Chinese demand and the idea that they keep buying. Managed Money isn’t holding massive longs in corn and beans because it’s a little dry in Southern Brazil right now. The entire play is based on the idea China has a major food problem that will keep them aggressively buying well into the future. With that, it’s a little concerning there hasn’t been a daily export sales announcement to China in well over a month.
The USDA report two weeks ago was shockingly bullish relative to “pre-report estimates” as virtually every metric – yield, carryout, etc. fell at or below the low end of guesses. Since that report, corn is essentially unchanged from its report day close despite having carryout slashed nearly 500 million bushels and beans are up just ~30 cents. Recall we expected the large production cuts to occur in this commentary two days before the report and we apparently weren’t alone. Regardless of pre-report estimates, the market was clearly already pricing in something closer to the Nov USDA numbers and it will now be two months before another update on the production side.
Beans are worth an almost unimaginable $24/bushel right now to Brazilians in their currency. Bean acres will get planted and acres should be up substantially from pre-planting indications.
Bean spreads have widened considerably (more carry/incentive to store) during the last leg of this rally; highly counterintuitive and unusual. And bean processor contacts have indicated some PNW export trains getting shifted back into the processor market.
World wheat stocks remain record large with major exporters sitting on comfortable supplies. Concerns in the U.S. and Russia have faded for now as winter dormancy sets in. Despite the strength in row crops, the wheat complex peaked in mid-October and has been drifting lower since. There’s an old adage that you can’t keep a grains rally going without wheat and it’s a struggle to see where wheat fireworks would come from right now.
The below charts compare 2020 to other recent major bean bull markets, 2016, 2010, 2012: Worth noting that the 2016 and 2012 rallies were of similar duration to this year’s rally so far and while the 2010 rally continued much longer, over 80% of the total price gain had occurred by the 3 month mark.