Will the Corn and Soybean Rally Resume?

By Chris Lehner | Archer Financial Services

Friday, August 10th, traders found out soybeans weren’t quite ready to rally based on new yield numbers in the WASDE report. The USDA increased bean bushels to the acre up 3.1 bushels to 51.6 bushels and projected yield to 5.040 million bushels. Ending stocks are expected to be 785 million bushels adding 205 million bushels from the July report.

Actually, it was old news. Not the exact numbers, but if anyone gave it a second of thought, it was easy to realize yields would increase. Week after week the USDA Crop Progress and Condition reports have told how good the crops have been growing. Corn and soybeans are ahead in growth by a couple of weeks, condition is better than a year ago and we know what happened to prices with last year’s crop size. Yes, there are states like Kansas and Missouri having problems, but when 70 percent of soybeans good to excellent with Iowa at 72 percent good to excellent, Illinois is 74 percent and Nebraska at 80 percent with most large grain growing states as good. You have to wonder why so many hedgers and speculators were surprised prices dropped. Throughout the day of the report I had several calls asking the same question. Did I believe the report?

Before any USDA report, when I am asked my opinion on market direction and how it might react, I won’t give an opinion. I will have opinions on supply and demand, but how a market will trade when a report is released is like throwing a sharp knife in the air and hoping to catch the handle and not the blade.  It is imperative to read the report and then analyze it. Depending on the client’s risk tolerance or how they are positioned, stops are placed, or futures are offset with options, but trying to guess market direction after a report may catch the blade. I strongly feel markets move after reports according to how algorithmic formulas read the statistics from predetermined functions set.

As pointed out in previous reports, there is nobody who can open the USDA website, read the first couple of pages with highlights and know the direction to trade and enter the order in less than a second after the release of it. However, markets move immediately after the release. Fundamental trading, hedging or speculating is not about making a better guess, it is the same as algorithmic formulas trade. Make trades on information available. For algo trades, it is mathematical functions based on applicable and tested statistics. For the fundamental trader, trades are made on information and facts at hand and judging how they will move markets. It isn’t about guessing what may occur in the future with unknowns, it is using what is at hand and projecting facts to the future.

After a couple of days after the release of reports, the dust settles, reports are studied and algo traders that use the timing of reports have packed up and will wait until the next report. Of course there are algorithmic traders that trade every day or are in the market, but the long term effects of the report do come into play along with any new news.

I think it is important to realize after markets dropped Friday, most producers shut the gate and turned off the phones.  With September soybeans dropping to $8.39 ¾, and new crop December corn falling to $3.66, farmers that didn’t sell in May through June when September soybeans were above $10.50 and December corn was $4.20 or better, unless somebody put a gun to their head, right or wrong, they are not going to sell beans with the current extremely wide basis for cash beans near $7.75 in many areas of the U.S., or corn slightly above $3.10 to $3.20.

August in some ways has been good for some producers.  It was good especially for those that used the spring rally to hedge and for those that took advantage of the carrying charge. As of August 13th there have been 7,257 soybean contracts delivered using the August contract. It means old crop stocks are going down.

The report actually had some bullish news that seemed to be swept aside, but it is just as important as growing a larger crop. “U.S. soybean changes for 2017/18 include higher exports, higher crush, and lower ending stocks. Exports are raised 25 million bushels to 2,110 million on strong export sales and shipments through July. Crush is raised 10 million bushels to a record 2,040 million on strong soybean meal exports. With increased crush and exports, soybean ending stocks are reduced 35 million bushels to 430 million.”

All too often markets tend to concentrate on U.S. growth and production. But with low prices in Chicago and even lower prices in the country, there are opportunities to buy. The ethanol industry will benefit and is benefiting from a wide cash basis and low futures prices tied to rising fuel prices. With the recent drop, there are feedlots in the U.S. that now can keep above water.

In a previous report I touch upon the possibility of China buying U.S. soybeans and corn. First of all, there are rumors flying around that the U.S. will move beans through Brazil to China. It surprises me how many people think when the Thursday morning export sales are released that the countries listed as destinations are the actual buyers.  It does take place, but mostly the buyers are private users such as a crusher that are from the countries listed and not governments purchasing listed exports.

However, in the case of China, China does have a grain buying division, Sinograin. But normally, companies including well know grain companies with their headquarters in the U.S. with divisions in China are the buyers or private “traders” buying grain in the U.S. and then selling it to users. It is the same way grain is bought and sold in the U.S. when imported from other countries. For example, the U.S. government doesn’t buy soybeans and corn for poultry and hog producers in the Southeast U.S. The companies using it import it. But when Brazil lists its exports, it lists the U.S. and not the individual buyers.

Personally, I don’t believe for one second that the government of China will allow private crushers or grain/oilseed buyers to bypass tariff taxes it has imposed on U.S. grains. They imposed the taxes as retaliation on President Trump’s tariffs on Chinese goods and commodities from China to the U.S. However, as it is now and may actually benefit China, Sinograin, which buys grains for the Chinese grain reserve, can purchase U.S. grain without the tariff. For years talk has centered on China’s huge stockpile of corn, but as I have previously reported, China has strategic reserves of many commodities from corn, soybeans, rubber, steel and on and on.  In some ways, they implemented the reserve program in case prices shot up or were in low supply. For reasons that are not important now, before Sinograin was the buyer, private buyers purchased far too much corn on the world market and then sold it to the reserve. At the time China had high internal support prices for corn and buyers purchased far too much on cheaper world markets instead of higher internal prices. China realized they needed better control and with COFCO, a huge government owned conglomerate and Sinograin a state owned enterprise to ensure China’s food security took over the buying. When reserves need to be sold, such as replacing old crop for new, they auction commodities in the reserve to users in China.

If soybean stocks become too low or prices too high, Sinograin can buy soybeans to refill the reserves. They could also buy on the world market and sell at prices at the soybean support price. In other words, it will encourage private users like crushers to buy from countries outside of the U.S., or better yet from Chinese producers. Buying from Chinese soybean producers will encourage increased planting of soybeans in China and less corn to be planted, which has been a goal of China for years.  When push comes to shove, commodities such as soybeans and pork that have tariff taxes on U.S. commodities exported into China, now are encouraging internal growth. But for now, and probably through November, China has supplies coming from Brazil. China will be in the U.S. market, but for its needs and on its conditions. Trade agreements with Brazil, along with private companies from China, pumping money into Brazil will in years to come help grow production in Brazil.

But with the drop in prices this year and as of the latest drop after the WASDE report, U.S. commodities may be attractive to exporters and users in the U.S. Meal dropped into new lows and has quickly moved up. U.S. livestock and poultry producers should be taking advantage of the drop in prices with the prospects of lower cattle, hog and poultry prices.

The information conveyed by ADMIS or its affiliates to the audience is intended to be instructional and is not intended to direct marketing, hedging or pricing strategy or to guaranty or predict future events, including the pricing and pricing movements of commodities and commodity futures contracts.

2018-08-14T20:43:54+00:00 August 15th, 2018|