Yesterdays’ USDA report changed the grain markets going forward, maybe dramatically. The market was somewhat relaxed going into the report having rallied nicely in all markets mostly because of wet weather conditions in the States.
Many traders were unwilling to carry positions into the report because of the weather uncertainty and because changing stats were not compelling. The markets’ initial response was surprising to many as fund buying escalated, stat pushers thrust reduced carryouts for 2016 into news channels, and option call volatility exploded.
The reduction in this years’ carryover in corn and beans tightened next years S and D in both markets and set in motion creative pencils reducing yields, acres, and stocks at the same time – a bullish trifecta, if you will.
For the moment at least traders have forgotten about the big crops of the Southern Hemisphere in corn and beans and their potential impact on world prices moving into our fall harvest period. We failed to look at our uptick in milo production and the emergence of low quality wheat into the domestic feed grain market. A lot of demand numbers need to be analyzed and massaged before putting one’s foot in mouth on potential corn and soybean carryouts next year and a lot of weather days need to ex[ore as the market continues to attempt to estimate yields and acreage.
USDA has now announced they will look to adjust their soybean, cotton, and milo acreage numbers with new surveys in some states within the August 12 report. This was a given in my opinion. We must get to some certainty about production before we see the results of the combine yield monitor. But the markets have a lot of time to massage the numbers in the interim which will expand daily ranges and keep volatility levels strong. Sometimes the second day – the day after the report, is a better indicator of what lies ahead. That first day at 11 a.m. not everyone has their guns loaded. Some need a board meeting to choose their weapons and pull the trigger.
If the market starts to feel better about actual acreage and as the crop season progresses all through the Northern Hemisphere and we understand the impacts of weather better, we will start to see just how dynamic the upside of this market move can be. Yes, I said upside. – Just too many changes and issues and inputs, so time must pass, but we now have bottoms to the grain markets say the technicians. That should change the makeup of these markets. The user will be more involved protecting risk on setbacks if nothing else. The producer will be less vulnerable in his mind, and I agree, which should help him weather the storm of too many bushels of old crop corn which has been the albatross around the markets neck for 6 months.
Wheat came along for the ride yesterday amidst forecasts for hot weather in the EU, the biggest wheat crop in the world, and forecasts now extending that heat in Poland and the Ukraine. Heat is also impacting the white wheat in the Pacific Northwest and the Canadian prairies and then there is always El Nino threats to the Australian crop. The U.S. crop is big and carryovers are expanding although feed wheat will be a bigger percentage of this harvest. Weather can continue to create an unsettled futures market, but at the end of the day, maintaining these premiums to feed grains should be very difficult.
July weather could not look better for the western belt where 60% of the acreage lies – cool and wet for this area makes for more double crop acres, and creates a nearly euphoric farmer. For the east U.S. we have to see what the damage is and dry weather and maybe warmer weather will help that exercise – in short, time must pass. Yes we have changed the production side of the equation, no arguments – but have we reduced it enough?
CLICK ON CHART TO EXPAND: