Farm Futures - Weekly Market Recap
Weekly Market Recap
Bryce Knorr, Farm Futures senior editor
October 14, 2016
USDA’s Oct. 12 production, supply and demand reports confirmed the obvious: Demand is good, but supplies are bigger. Yet the report did little to change the pattern of prices. To be charitable, futures markets performed like a proverbial drunken sailor. But at least the market appeared to be falling forward, mostly.
Corn, soybeans and wheat all posted bearish chart reversals in the wake of the report, then changed course the day after. By the end of the week, corn and wheat were posting bullish breakouts from long-standing patterns, with soybeans also trying to move.
This so-called technical buying can feed on itself, because some fund managers base decisions on charts, not fundamentals of supply and demand. These big speculators placed large bearish bets that corn and wheat would fall. When they didn’t, money managers bought back some of those wagers, a process known as short covering.
Make no mistake, this type of buying isn’t the same thing as a rally driven buy end users scared they won’t be able to find what they want. Still, there were signs that these customers were interested in securing some of their needs. Demand from U.S. corn exporters, livestock producers and ethanol plants will average around 50 million bushels a day this fall, the peak season for demand. That’s the equivalent of almost 300,000 acres.
Wheat demand can’t match that. But buyers in international markets jumped into the market after the USDA report. Most of those deals are being done with our competition, but it’s a sign that prices are a value.
Grain futures weren’t the only markets acting erratically, which explained some of the back and forth in soybeans. While stocks, the dollar and crude oil all showed a connection to soybean price movements at times this year, lately futures have again been following equity prices in China. That makes sense, of course, because the world’s largest country is also the world’s largest importer of soybeans.
Weak economic growth in China convinced the government to steadily devalue its currency, which is trading at a six-year low to the dollar. That helped boost its exports in September, but overall trade was weaker than expected. Those fears were quickly allayed by news producer prices in China turned positive for the first time in five years. This whiff of inflation was taken as a positive tea leaf for those trying to read the financial future. Companies in trouble can’t raise prices.
It’s a muddle, but one that’s offering a few opportunities to slowly make sales. Most crop markets are offering carry on deferred futures for hedgers waiting for basis to strengthen.
Corn prices looked ready to give up following USDA’s confirmation of a crop topping 15 billion bushels. The agency trimmed its yield a little but also found farmers put in more acres than previously reported. Strong demand could offset some of the huge supply, but ending stocks for the 2016 crop marketing year could still top 2.3 billion bushels.
Nonetheless, the market’s move above chart resistance keeps alive potential for a December futures rally to the $3.65 to $3.68 level. Growers sitting on a lot of inventory might not want to wait for all of that, however, easing into some protection. Basis is still weak so other alternatives will work best, such as hedge-to-arrive contracts or maximum price contracts. Those mimic the sale of call options to earn premium value. These cap the selling price but will defray some of the cost of storage.
Soybeans offered something they haven’t in a while: carry in the futures market for those wanting to hedge inventory. The spread between November and deferred contracts on the 2016 crop isn’t enough to pay all the cost of holding beans, but it’s still running around 2.5 cents a month. Nearbys have traded mostly above deferreds the past couple years due to tighter supplies and strong demand, but that dynamic is fading.
Average soybean basis is strengthening, but depends on who’s buying. Those selling into the export pipeline may just be able to let some beans go in the cash market, because basis is firming rapidly along parts of the river system. Processors are still easing bids due to weaker margins.
A Chinese trade delegation signed commitments to buy around 187.5 million bushels of soybeans Oct. 14, though these deals don’t always show up in weekly sales totals right away. A more pressing concern could be weather in Brazil. Rains in parts of the key center-west growing region have been somewhat hit or miss since planting began, so weather concerns may be the best bet for gains now.
Wheat prices finally showed signs of life, but don’t take these gains for granted. While basis in the cash market can tighten into December delivery, futures gains can begin to sputter after a modest fall bounce.
Concerns about acreage and winter wheat conditions can keep prices from falling apart, the best case argument for avoiding new lows now. But growers still holding 2016 inventory need to start selling, because few have protection on their 2017 crop. Prices aren’t great, especially for hard red winter wheat, but quality premiums are available for some classes. Coupled with record yields and farm program payments, that could help ease the pain.
Spring wheat remains the star, offering growers on the northern Plains a chance to start hedging next year’s crop too. Nearby Minneapolis is trading at more than a dollar premium to winter wheat, a spread that likely won’t last long term.
Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Advisor. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.