“The market is never wrong” keeps ringing in my head as I watch another rally in corn and soybeans fall apart in spectacular fashion, just as we had neared the higher end of what has been the recent range in value. Price action continues to tell the same tale, and that is that end users and speculators feel perfectly comfortable with the world outlook when it comes to having more than enough supply to meet demand.
When talking to friends on the cash side of the industry there seems to be a lot of confusion about just what it is that the market is doing. We have had an interesting stretch in cash grain, moving from the 2014-2019 period, where rallies were shallow, supplies were adequate, and traders were uninterested, to one of aggressive end user coverage and the inflation trade that ran from late 2020 until at least the start of last year.
While it is too early to say whether the inflation trade is over completely, it does appear as though the attraction to commodities has shifted.
When looking at the balance sheets and fundamental outlook for grains, the overwhelmingly bearish sentiment is not necessarily a surprise. No matter your position on the USDA and its numbers, the cash market, with wider carries and weaker basis (especially in wheat) than seen the last couple of years say the pipeline is adequately covered.
However, there are some signs that the cash grain markets around the world could become exceptionally volatile in the months ahead. So, while I agree, the market is never wrong, I do sometimes wonder if it may not be misreading the room.
One of the more common observations that is making its way around the cash market is the lack of end user coverage. Third quarter coverage is said to be lighter than what we would traditionally see for this point in the year across a whole host of end users, with folks saying fourth quarter coverage is even less. The slower than usual move to cover needs is being attributed to thoughts there is more than enough supply to meet demand, and the idea that prices will get cheaper in the weeks and months ahead.
To be honest, I can’t fault them for that, you cannot turn on market commentary these days without reading about the poor pace to new crop export sales—even though that’s more of a soybean phenomenon than anything, with wheat sales ahead of a year ago and corn sales inline—or the excellent weather outlook for much of the United States.
I have seen folks across the industry say more than once there is absolutely nothing bullish in play for these markets, and while market action and trader sentiment say they’re right, I feel it’s important to point out a few things that could flip this market on its head when we least expect it.
First, and the biggest, next week’s quarterly stocks and acreage report. The June acreage and stocks report is arguably one of the biggest of the year, with the most potential for a surprise. Just as I had cautioned ahead of the March acreage figure that overall acres could be less than expected, I am worried we could be in for another acreage surprise as the continuation of low prices and less than ideal weather for the start of spring had growers rethinking some of their initial planting plans.
I work directly with over sixty growers here in the state of Michigan, additionally talking with dozens of others throughout the country; farmer sentiment is near one of the lowest levels I have seen in nearly 20 years. Growers are scrutinizing their options not only when it comes to what to plant, but also when it comes to what they put into their crops to target optimal yields and performance.
Across the state of Michigan anecdotal reports of big switches to bean acres continue to circulate, and while this is not necessarily indicative of what is happening around the rest of the country, I will be interested to see if the USDA’s survey data pushes them to make any adjustments to their corn acres and acres overall.
The stocks figure released next week will be a major focus as well, with some cash traders suggesting that last year’s crop size could have been overstated based on what they’re finding when working to originate bushels and looking at recent nearby spread strength. I have talked about the changes we could see in cash grain movement with the farmer holding more than their normal share of supplies, so I take this idea with a bit of a grain of salt and will be looking to the stocks figures for any confirmation of less available supply than expected.
In addition to the USDA updates next week, I will be watching further developments in cash grain closely. The bean market is still surprisingly stout for what we would expect to see with a 350 million bushel old crop carryout. The July/November bean spread looked poised to break out last week, pushing to new highs before easing slightly into Friday’s close. Meanwhile, the July/September corn spread came in to around 2 cents or less worth of carry, something that should not be the case with a 2 billion bushel carryout. Wheat spreads are wide, but have strengthened from recent lows, bolstered by the recent strength seen in basis here in the US.
In the end, while I know better than to fight city hall or the markets, I struggle to remain convinced we know all there is to know about market direction and needs on June 17th. Seasonally the market is at risk of falling apart from here, but it does seem as though seasonals have been one of the less reliable market cues this year, with the seasonal rally that’s been well advertised since January seemingly a no-show.
I will continue to watch cash for signs of buyer interest, with a belief at this point it is likely to take Chinese buying interest or a weather problem to develop to push us to new highs, with it being early enough to not count either of those things from happening just yet.
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On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.