Market Thoughts 9.13.20
December corn added 10’4 this week to settle at 368’4, eclipsing highs from early July to post the highest close for that contract since early March. November soybeans added 28’0 to end the week at 996, making this the fifth consecutive week of a rally that has now produced nearly 130 cents of gains and pushed November beans to their highest level since April 2018 (pre trade war). Despite all this December spring wheat somehow actually lost 10’4 on the week to close at 532’2.
Friday’s USDA report highlights:
The USDA gave us Yield, U.S. Carryout and World Carryout projections for corn and beans that all closely aligned with pre-report estimates, something that rarely happens…And, ignoring some isolated weather issues, the USDA continues to forecast massive world wheat stocks.
In the wake of a USDA report that fit snuggly with pre-report estimates, confirmed record world wheat stocks and offered a multi-decade high for U.S. corn stocks, massive bean-led buying showed up with a surge at the close settling corn and beans near their daily highs. We discuss often the importance of market behavior on “event days” such as a WASDE report. Last month we noted our favorite signal, ‘markets trading the opposite direction of trend and news on an event day’, and it didn’t disappoint. Last month’s WASDE was the starting point of an impressive rally that most (us included) didn’t expect. As for this month’s report, the price action following it suggests Managed Money still has considerable appetite for beans and with no bearish surprises in the report they’re ready to press higher.
During the rally, beans posted 12 consecutive higher closes (that must be some kind of record) followed by a meager 2 cent decline and then Friday’s explosive advance. The bull needs to be fed daily as the saying goes and the market has obliged. Corn and bean export sales announcements have been almost a daily occurrence, pushing new crop sales of both commodities well into record territory for the time of year. And on the supply side, the market’s attention has been held first by the impact of the Derecho and Iowa’s drought/falling crop condition ratings and now La Nina forming (strong correlation with below average SA production) and our freeze in ND.
But with this rampant enthusiasm, the warning signs are starting to mount. Managed Money has swelled their net long in beans north of 170k contracts, highest since March 2018 and I believe the highest level for this time of year since 2012. Technicals are massively overbought with the 9 day RSI in beans at an incredible 91.44, while glaring gaps remain to be filled on the corn chart. Stories circulated on Friday that Chinese bean inventories were their highest in over a year and the most recent government corn auction didn’t fully sell out. Outside markets aren’t helping as crude oil and equities have been under considerable pressure recently. And from a fundamental standpoint corn is clearly overvalued. Dec corn closed at 368’6 one year ago today. Corn is somehow within ¼ cent of its value a year ago despite a projected 400 million bushel larger carryout. (Crazy to think of everything that’s happened in the world and commodity markets since then and somehow corn is at the same price…)
Strong technical sell signal formed for corn this week:
Relative Strength Index (RSI) extremely overbought with readings approaching 80 for the first time in over a year.
RSI crossover as the unsmoothed (jagged line) crossed below the smoothed line last week.
And bearish divergence – RSI trending lower and not making new highs despite futures trading to new highs.
Over the past few years these three combined have been extremely reliable, including correctly indicating the market peaks in June of last year and January of this year.
While this has been a horrible year for analogs/seasonals, we do still think there are some striking similarities to 2016. The Sep 2016 WASDE projected corn stocks/use at 16.4% and beans at 8.9%, similar (though slightly tighter than 2020), and there was a huge pre-harvest export program in 2016 (though not as massive as this year). In 2016, Nov beans traded between 945 and 1016 between now and expiration while corn traded between 330 and 357. If that’s the case, then beans are at the top end of their range and corn is already too high…
As for what happens next, our deeply held conviction from two weeks ago that the rally would be topped out by the time we wrote this column doesn’t feel quite as strong. Predictions in this space are normally based on probability (what’s likely to happen given what has happened) as opposed to discovery (here’s something we think we know that no one else does). And to that end our thoughts shouldn’t be wavering I suppose. There is little precedent for grains sustaining a rally through harvest with a market structure such as exists today (Managed money long, tech overbought, massive corn/wheat carryout and adequate bean carryout). However, watching the markets trade these past two weeks, it seems there is more to the story than simple fundamentals and the metrics that try to describe them. We’re growing increasingly convicted that there is a food inflation/supply chain disruption story here and that is what is driving price behavior such as we saw after the report on Friday. Thus the risk management challenge – we can’t abandon discipline now and risk wasting the incredible rally but we’re still inclined to consider the upside that could come if there is an inflation/supply disruption move to come. Beans are officially in the next phase of the rally now. After a remarkably orderly move from 910 to 980, they broke out higher on Friday and should move in big chunks now, both up and down.