Market Thoughts 8.30.20
Nearby September corn gained 19 cents to close the week at 346’0. Sep’s weekly high of 347’6 came in below early July’s 355 peak but the close was highest for nearby corn since mid-March. Corn has now rallied 40 cents since making contract lows three weeks ago. September beans added 49’6 to close at 950’4. This is the highest weekly close for Sep beans since late January and the largest weekly gain beans have had since July 2017. Despite the fireworks in row crops, Sep spring wheat only carved out 3’4 cents of gains, closing at 518’4, though that contract did manage to trade to 529’4 earlier in the week, nearly 40 cents higher than contract lows three weeks earlier.
After a pause last week, grains resumed their counter-seasonal rally in earnest, led by the sort of near-vertical performance from beans we became accustomed to earlier in the decade but haven’t seen in several years. Not surprisingly, this week featured the rare perfect setup for such behavior as there was abundant friendly news for supply and demand. On the supply-side, unusually hot/dry weather persisted for most of the Corn Belt, with the problem areas of western Iowa sliding further into extreme drought. Coupled with the derecho storm from two weeks ago, Iowa Good/Excellent corn ratings have slid 19 percent in just two weeks with Monday’s crop progress showing a much steeper slide for the overall U.S. crop than was expected. On the demand side, bulls had export announcements every day except Friday, high level officials from both countries were quoted as saying Phase 1 is going well and a Chinese trade publication indicated the country is on track to buy 40 million metric tonnes of beans from the U.S. this year, easily eclipsing the 2016 record.
Trade seems to be zeroing in on the idea that bean yields are 2.5-3 bushels overstated while seemingly inflated demand numbers are realistic given recent sales and rhetoric. This is causing beans to essentially “reset” to a price level that reflects something closer to 10% stocks to use. For what it’s worth, it would be highly unusual for the USDA to make such drastic cuts to its August yield numbers in its September WASDE. That said, 2011 is a recent example of a year where crops got off to an excellent start but were saddled with an August “flash drought” and ultimately well below trend yields. We don’t believe however that 2020 will feature anywhere near as steep of yield decline as 2011 experienced. While the circumstances overall are much different, we think 2016 remains a good analog to 2020. That year saw record corn crop/huge carryout, much tighter bean carryout and (to date) record export sales to China. Beans rallied 80 cents in August 2016 and then traded sideways into harvest while corn posted a late August contract low of 315 before rallying 44 cents. Beans have rallied 85 cents so far in August while corn put in a contract low at 320 and has rallied 39 cents.
So what now? Grains almost certainly start the week stronger, led by beans. Rumors swirled late Friday of another large China purchase and this probably gets announced on Monday along with further deterioration in condition ratings. After this week though, the case for bulls gets much trickier. Technically, the extreme overbought conditions and glaring gaps on both corn and bean charts are warning signs. The overwhelming amount of spec buying is also a flag. Overall managed money/index length across all grains is the largest it’s been in almost three years, managed money bean net position is the largest since 2018 and corn net position largest since a year ago(when corn had a drastically different balance sheet). We continue to think corn demand was overstated in the Aug WASDE and we’ve seen several years in a row where yields ultimately outperform prevailing conditions. With all those factors and the U.S. growing season wrapping up, strength has to come almost exclusively from the demand side. While we think it’s highly probable that grains feature one more week of strength; beyond that grains struggle to move much higher ahead of harvest and it’s probable they retrace a chunk of their August gains.