Market Thoughts 11.8.2021
Dec corn lost 15’2 to finish the week at 553’0. Ugly week chart-wise as futures gained 10 cents on Monday and had tacked on another 7 early Tuesday before dropping 26 cents on a three and a half day losing streak to close out the week. Prior to the meltdown, corn had rallied 80 cents since October 13th and reached its highest levels since the August S&D. Jan beans lost 44 cents to close at 1205’4. Futures are just above the daily low of 1195 from October but this is the lowest weekly close for beans since pre-March Planting Intentions. Dec spring wheat lost 42’4 to close at 1009’4. Futures traded as high as 1086’4 on Tuesday before falling 80 cents.
Beans were doomed last week by a combination of tough outside markets (new highs for $, crude oil off $5/bbl), China buying Brazilian beans for Dec shipment and perhaps some fear of carryout increases ahead of this week’s Nov S&D report (both higher yield and lower exports). Given the current U.S. and global bean balance sheets and generally favorable growing conditions across Brazil and Argentina, beans need support from inflation/other grains to fend off further losses.
Here’s something that kind of sneaks up on you – beans are technically in the worst bear market of our lifetime, having now posted losses for seven straight months on the continuous chart since making highs in early May. (Recall that our algos signaled that high and we also heavily discussed it in commentary that week.)
Late last summer we started talking about corn holding a 480-550 type trading range through the fall/winter until there was a catalyst to break out either higher or lower. That range held for three months, with nearby corn trading as low as 487’6 (on the day that our algos hit a buy signal in corn) and up into the 540s a couple of times. This then begs the question, is the fundamental news that pushed corn to 586 last week enough that we should expect the rally to continue? Corn rallying due to fertilizer situation, massive ethanol margins and as the liquidity source for major specs wanting in on the wheat/commodity hyper-inflation story. It seems as though all three of those stories have some staying power. Nearby corn is now nearly two-thirds of the way through filling the gap on its chart left when July expired; corn should at least make one more push to fill the 620 gap at some point but could be much further down the road given the headwinds right now.
We had the below Price Signals update on wheat/corn Tuesday morning and the market proceeded to lose 80 cents over the next three and half days. So now what? These are the things to consider:
A couple things to note this morning – spring wheat now just under outright Sell Threshold level after last night’s algo update. Three previous times during this rally wheat has spiked above Sell Threshold and all three times featured an abrupt collapse in prices followed by a resumption of the uptrend. Looks like another sharply higher day in store and if so, will likely spike above the Sell Threshold.
Second, on corn, price signal now approaching 60 and its highest level since mid-September. Below that chart is the Oct 2011-Mar 2012 time period, the seasonal stretch we view as analgous to this year. One thing to highlight, the bottom chart is taken from our web application, now almost complete, that will give the user unlimited access to Price Signals and replace this email. But more importantly, after 2011 corn made its lows (correctly indicated with buy signals on the chart), the sizable rally that followed saw algo readings peak out around 70, not quite making it to outright sell signal levels. The point I guess is corn is quickly getting to price signal levels that warrant looking at making a sale.
The next couple days are critical. Spring wheat has had three other major corrections in this bull market – all of them were three day losses with futures then not trading meaningfully lower again.
Spring wheat/wheat fundamentals didn’t necessarily change. Market was ripe for a correction and outsides/beans gave it the shove it needed, but everything we thought fundamentally about wheat last week remains the same this week.
For some context, spring wheat was in some thin air at 1086 on Tuesday morning. Apart from the 2007/08 rally, nearby spring wheat has only had one weekly close ever above 1060 and less than four weeks after managing that it was back below 900.
Most troublingly, cash wheat markets are terrible right now. Outright basis values are some of the poorest we’ve seen in several years and after accounting for inverse/rolls, this is basically the worst basis ever for the time of year. Healthy rallies are cash-driven (always) and it’s a warning sign that every elevator in ND is sitting full of wheat right now.
The below chart illustrates 150bu/acre corn less Nitrogen fertilizer.
This is a simplistic view (board futures prices, doesn’t account for all other increased costs, etc.) but it is directionally accurate. It is also this: We believe Tuesday was the highest-ever profitability margin for new crop corn ahead of planting. Corn futures have outpaced fertilizer costs on the runup and corn continues to look hugely profitable and easily the most profitable of the three principle crops right now.