The July supply and demand update from the USDA was released this week with a handful of surprises. The too long didn’t read version by commodity would break down as follows, surprising (to some) cuts to exports helped to offset much of the production lost through reduced acres in soybeans, while in corn yield was not trimmed as much as expected, with new crop demand surprisingly left unchanged, and for wheat, late rains helped boost production a bit, adding bushels to new crop carryout.
Weather-wise we are heading into one of the most important parts of the production season for corn, with pollination getting underway across much of the Corn Belt. The pattern has gone from one of the driest stretches of weather in history, to a far more active one, providing crop saving rains across much of the heart of the country’s main growing regions. There is dryness developing in the Northern Plains, with long-term dryness that needs to be watched across the Canadian Prairies, but for the most part the forecast for the next two weeks looks relatively benign.
Moving beyond the Fourth of July generally marks a shift in market sentiment and price direction. Traditionally, after the June acreage update and the July WASDE we see the market start to fall off a bit, as we tend to feel more comfortable with the production outlook and the demand side of the equation seems generally straightforward.
This week would prove, at least at this point, this market has no intention of following through on what *should* do. Many traders were pretty confident the market action seen after Wednesday’s report would be what we would see for market direction the rest of the week. After all, the USDA has plenty of room for further cuts to demand in new crop corn, with recent rains likely stabilizing the production outlook so far—barring a major shift in August weather.
Soybean production remains a big question mark, but with new crop exports still running around a third of traditional sales pace and reports of China purchasing Brazilian beans for December shipment, there is likely still room for further adjustments if prices remain elevated or were to rally further on the back of production losses, real or perceived, here in the US.
There are several factors at play that helped push the market higher to finish this week in my opinion, not all of which are long-term players in market direction, but they will play a role in short-term price movement for sure.
The first and perhaps my favorite factor currently driving market direction, is outside market psychology. It doesn’t take much reading or analysis to recognize that the outside market sentiment is exceptionally optimistic. With CPI coming in a bit lower than expected this month, showing the increase in prices consumers are experiencing is continuing to slow, and other data showing the labor market remains strong, many feel a soft landing remains possible.
To a certain extent, I think the pure fact that no major player in the economy has been allowed to fail over the last 15 years or so plays a role in this exuberance. This leaves so many expecting a significant change in Fed policy at just the right time, or at the very least before anything truly bad happens to the economy. The idea we have a Fed put in place no matter how stern Powell is at the podium keeps traders engaged and folks looking at commodities as a possible investment. This especially when looking at where grain markets are trading in relation to their recent range, appearing ‘cheap’ when outside markets are trading to multi-month highs.
Of course, with the general excitement in outside markets and trade driven by a fear of missing out, talk of China returning to the market in a big way acted as gasoline to fire. Rumors of major Chinese purchases circulated this week, with confirmed big soybean buys out of Brazil and limited confirmed soybean business out of the US. Limited corn business was confirmed to have been done out of Brazil as well, with tweets claiming major US business had been done with absolutely zero confirmation, or signs of that taking place in the cash pipeline.
The Chinese corn market is at an interesting place it seems, with prices having rallied since the middle of May and demand in the country seemingly on the rise. It is interesting to note, corn prices in parts of Henan have crept above wheat prices, a spread that does not typically remain in place for long. The increase in Chinese values and drop in US and subsequently Brazilian values has made corn imports economically feasible into China again, though at this point, unless traders are far quieter than they have been in the past, actual confirmation of big corn business remains fleeting.
Continued expectations of major stimulus from the Chinese government will act as support in the markets as well, as in the past stimulus has worked to increase domestic consumption, upping import needs significantly. However, the idea that Chinese stimulus would be put in place to increase import needs would go against everything the government has said when it comes to food security over the last several years.
In addition to going against their claims, stimulating imports would also overlook what could be part of the solution to China’s youth unemployment problem. Chinese leaders are far more likely to pour money into programs helping to develop and modernize their rural economy and infrastructure than they are to work to incentivize imports in my opinion.
Having mentioned Brazilian export business, I would be remiss not to talk about what I am watching there, as we are truly on the cusp of what will be one of the most interesting cash markets I have had the pleasure of watching develop in my career.
Brazil’s storage space shortage is not a new topic here, as the growth in their production has far outpaced the growth in their infrastructure. Pictures and videos of massive grain piles are already making their way around social media with Mato Grosso around 50% harvested, and the overall Safrinha harvest pace less than a third complete.
Farmers in Brazil have been slow to sell their second crop corn as many were optimistic regarding the price outlook and were surprised by the large drop in values ahead of harvest, especially considering it has pushed the price they are receiving below the cost of production.
With around 70 million metric tons (2.8 billion bushels) of corn left to be harvested in the coming weeks and reports of space already tight and logistics already a mess, how the Brazilian cash price remains supported from here is a mystery.
In addition to watching developments in Brazil, we have talk of another round of the Soy Dollar out of Argentina, this time potentially including corn and sunflower, with a better conversion rate than the last round. The Soy Dollar has incentivized sales of soybeans in the past, with this being the first time it would be applied to corn, if it in fact is. What that could mean to the global pipeline will be interesting as Argentina has been a cheaper supplier of corn recently even before incentives.
All of this without even having mentioned the Black Sea Grain Corridor. Markets rallied late in the day Friday as we went home without any confirmation the deal will continue after its expiration tomorrow. The last ship to operate under the current agreement loaded Friday, with no additional ships listed for inspection.
While I’m not going to sit here and pretend the corridor does not have value, as it provides the cheapest, most efficient export route for Ukrainian products; the lack of its existence does not take Ukrainian grain out of the equation when it comes to making purchasing decisions, it just makes it more expensive. However, a lot of money has gone into helping facilitate alternative export routes, keeping grain flowing, even if it is in a less than ideal way.
In the end, both sides have a need to keep the corridor open and working, for Ukraine the reasons are obvious, while for Russia it remains their most powerful bargaining chip. This makes it likely a resolution is found by mid to late week, one that will hopefully keep the shipping lane open far longer than 60 days at a time.
Overall, while the supply side of the market may start to become clearer in the coming weeks, demand remains more in question than ever. Ideas we will see supply disrupted just as demand from China could be on the rise ran headlong into overall optimism, making for a fun end to the week of trade.
I for one will not step in front of a running market, especially when uncertainty over Chinese demand is involved. However, I will continue to look to the cash market for signs of a major shift in fundamentals on the physical side, so far, that has not been seen.
As always, don’t hesitate to reach out with any questions! Have a great week.
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.
