Free Commentary

Despite accusations to the contrary, undoubtedly leveled by those on the losing side of a market swing, our grain and soy markets are still directed by the forces of supply and demand. Sometimes, what we cling to be true about those factors may be askew, and we will push further in one direction or another that was reasonable. While that can translate into a tragedy for some participants and opportunity for others, we ultimately find a balance between the two forces, even if that were just for a fleeting moment. Granted, sometimes, it may be challenging to recognize what is happening with the underlying circumstances, and it is far from what one might think is perfect, but let’s be honest, perfection is just a myth, to begin with.

The action in grain and soy trade over the past six weeks would appear to be a simple and classic example of these forces at work. At the end of July, the supply side bears thought they had it “made in the shade,” so to speak, as we had moved through corn pollination with no significant issues, and in just a few short weeks, the bean crop would be all but assured and with ample global supplies, it was going to be smooth sailing right into harvest. Of course, with the benefit of hindsight, we know that the long-awaited demand shift appeared to have arrived and then mother nature decided to toss in a weather anomaly that no one could have foreseen, and just that quick, everyone’s balance sheets were rendered obsolete. Of course, the market’s job at that point is to try and reflect that shift, which up to this point has resulted in a 23% advance in nearby corn and 18% advance in beans (from the end of July).

Of course, the billion(s) dollar question now is, have we moved far enough to adjust for the change in the perceived underlying fundamentals at this point? I suspect the defensive market action we are witnessing this morning bears that out. On the one side, we still have consistent demand; as this morning, the USDA announced sales of another 435,000 MT of beans (132k China), and it seems the general assumption is that this will continue for now. On the other side, we know that harvest is beginning to gear up, and over the next 60 days of so, give or take a few hundred thousand bushels, we will be bringing home somewhere around 14.9 billion bushels of corn (2nd largest on record) and 4.3 billion beans (3rd largest on record).

Most certainly, one lower morning trade after a succession of six weeks of rally does not constitute that we have overbalanced to the upside, but I, for one, believe we are at or at least extremely close to that point. We have already reduced the production number from the once lofty estimates, and more and more people are convinced that China will now purchase enough to meet Phase 1, but of course, that means it has now become an expectation that has already been factored into the price realm. Sure, we have the uncertainly of what weather will hold in store for South America this growing season, but that sword cuts both ways. One last factor to consider, when you look at the combination corn and bean chart, you can see that we have now moved prices back to the levels we were trading in early 2018. The reason that is important is that it takes us back to pre-trade war values, not to mention levels that we have not exceeded since 2016. While the corn market does have a little carry left within it, beans are already inverted and combined with strong basis levels in many regions; there would appear to be little reason to store crops, particularly when you factor in the additional expenses of extra drying and storage. The market is telling you something, and it is generally best to heed the message when that is the case.

As an additional cautionary note, according to the CFTC, as of the 18th of this month, managed money has now increased their long position in soybeans to almost 192,000 contracts and in corn to just over 58,500.

Of course a trip to your local FSA will provide all the details, but I understand that the $14 billion of additional assistance that was announced by President Trump last Friday will include payments of approximately, $.23 per bushels for corn production, $.31 for beans and $23 per pig for the hog sector.

Finally, this morning, it would appear that the pork supply situation in China remains precarious at best. Despite the aggressive efforts to rebuild the herd, reportedly reserves have dropped 452,000 MT over the past twelve months, and they have less than 100,000 MT of inventory at this time. (Link) Although wholesale prices have stopped accelerating, they remain at prices that are more than double a year ago. Seeing that China halted imports from Germany last week due to a couple confirmed cases of ASF found in wild boars, this would seem to keep the expectations for US exports to that nation quite positive.