Market Thoughts 8.16.20
September corn gained 16’6 this week to close at 324’4. This comes after five consecutive weekly losses added up to 48 cents of decline and a contract low of 307’2 the Friday prior. Beans posted a gain of 31’2 cents with September closing at 897’0. And September spring wheat managed to tack on 3 cents and close at 497’4 but not before making a new contract low of 490 earlier in the week.
Wednesday’s August WASDE report, very briefly summarized:
Corn Yield – 181.8, a record and slightly above average trade guess
Corn Carryout – 2.756 billion bu, just below average trade guess but again, largest in over three decades and some inflated demand #s to even get to that level
Bean Yield – 53.3, a record by a mile and way above average trade guess, above even the highest of individual guesses
Bean Carryout – 610 million bu, well above average trade guess, nearly double what we thought a couple months ago, and like corn, only getting down to that level with inflated demand #s
On the surface the report was slightly bearish corn and incredibly bearish beans. Given that prices closed higher on report day, it appears to have set up our most reliable of indicators, “trading the opposite direction of trend and news on an event day”. It’s been a few months since we last saw this (signing phase 1 trade deal was most recent example). To refresh, when there is an “event” day such as a government report, the “event” news is the same as the recent trend, (in this case bearish), and grains react in the opposite direction, it’s a very reliable indicator that a significant low (or high) is in place and trend is changing.
Along those lines, corn and beans were well into the seasonal decline expected by this column for the past month with both off nearly 50 cents ahead of Wednesday’s report. Technicals for corn turned positive on Monday with an RSI Crossover at Extremely Oversold Level and seasonally, while it is a little early for pre-harvest low, it is within range. Managed money rebuilt their massive net short position over the past five weeks of selling and were ripe for short covering. All of this coupled with the price action in response to the report and it’s tempting to say the market has priced in record yields, a major low is in place and trend is changing.
However, the more we’ve unpacked this, it looks to us less like that is the case and more likely a response to other key developments alongside the report:
Iowa’s derecho storm (100 mph straight line winds) caused massive devastation and played out in gripping fashion on social media. Adding fuel to wild speculation about extent of crop loss, the USDA included a special note that Wednesday’s report didn’t include damage from the storm and instead it would be reflected in subsequent reports. As is typical, analysts/commentators/etc. raced to issue the most outlandish loss figures possible and this chatter certainly leaned supportive. Fwiw, the weather group we most closely follow estimated the losses to be minor relative to overall corn/bean supply and noted that never in modern history has a regional straightline wind storm had a meaningful impact on national grain balance sheets. We certainly lean that direction today, but this has been a year heavy on “first time that happened” things and for now the market seems in the camp of greater damage.
FSA PP numbers totaled 7.7 million acres, which seems to fit perfectly with the USDA’s decline in total planted acres for 2020 versus 2018 (when there was minimal pp) but there’s been widespread discussion that the USDA is “overstating planted acres” of corn and beans to the tune of several million. Again, we don’t totally follow as the FSA numbers seem to support the USDA’s large drop in planted acres revealed June 30th, not imply significantly more acres lost. Regardless, the market views it as friendly now and we won’t have any clarification until the October WASDE report.
And for good measure, genuinely supportive fundamentals with bean export announcements every day last week and a shift to much drier 10 day forecast models.
So what now? The news above is probably good enough for steady/consolidation trade the next few days and depending on forecasts, should be enough to see corn fill the gap on its chart from early July and beans test July highs. But if/as those things happen, it looks like selling opportunities. Our opinion is that the derecho damage is overstated, FSA numbers don’t imply a major decrease from June 30th numbers, demand is overstated for both corn and beans and if last Friday ends up as the low for corn, it would be the smallest decline from summer high to fall low in at least fifteen years.