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Finally: A Market Turnaround

Tuesday, October 20, 2020
filed under: Marketing/Risk Management

       Grain and oilseed markets have made one of the sharpest turnarounds in memory over the past eight weeks, as of this October 9 writing. The tone of the markets was distinctly bearish until late July. Record U.S. corn and soybean yields and production were forecast by nearly everyone, including the USDA.  
       Corn ending stocks were expected to approach 3.5 billion bushels, and soybean ending stocks were expected to exceed a billion bushels. China has been very quiet in the U.S. export market despite the Phase One agreement. December corn futures were headed to below $3.00 and many believed November soybean futures could dip below $8.00.
       The tenor of the markets changed when the “derecho” windstorm moved across the central Corn Belt in early August, causing significant damage and crop losses in Iowa. The next bullish issue was that the market realized it also hadn’t rained across much of the western Corn Belt for a long time. That dryness persisted right through September, trimming yield estimates. 
       The mid-September frost/freeze across the Northern Plains caused more damage to soybeans than expected.  It looks like soybeans planted after mid-May lost 20% or so of their yield potential. Corn and soybean yield estimates started to slip lower.
       The demand side of the markets also started to accelerate, led by big corn and soybean purchases by China. Corn export sales are close to record levels for this early in the marketing year that started September 1 — double what they were a year ago. Soybean export sales to China are also huge compared to year-ago levels.
       Weather in other parts of the world has also been somewhat bullish:
  • The Ukraine has been very dry, perhaps the driest fall in more than a decade.
  • Southern Russia has been similarly dry.
  • Argentina is still very dry. The Argentine wheat crop was hurt, and analysts are now reducing their soybean production estimate.
  • Southern Brazil is dry. Planting has been slower than normal, which could push more soybean export business to the U.S. It could also reduce their Safrinha (second crop) corn production.
  • It looks like La Nina is strengthening. That can mean smaller South American crops as well.
       China isn’t only buying from the U.S. The Chinese have been aggressive buyers of Canadian spring wheat and dry beans. 
       The important question is, why is China’s appetite so big? Analysts have been reluctant to get bullish. Funds, however, have moved from a record large short position in corn to big long positions in every commodity.  
       There has been more and more chatter that China isn’t simply buying so much to fulfill their obligation under the Phase One trade agreement. Many analysts now believe that China must buy big amounts of soybeans, corn, wheat, dry beans, pork, etc., to prevent food shortages. Their huge surplus supplies appear to have been overstated and the quality is apparently not good. This year’s massive flooding also must have caused much greater crop losses than reported or admitted. 
       China is buying protein of every variety from several countries. The extent and duration of their buying will be critical to whether the current bullish markets are a short-term or longer-term event.
       The October USDA production and supply and demand estimates were bullish, especially to soybeans and other oilseeds.  U.S. soybean ending supplies are now forecast to drop below 300 million bushels. That is a bin-bottom level. It leaves no room for production losses in South America. 
       Corn ending supplies are now forecast to be about 2.1 billion bushels. That is still a big number, but it is manageable relative to previous estimates that exceeded 3.0 billion bushels. Wheat supplies are also dropping, but it will take either continued dryness across the Southern Plains or more purchases of U.S. wheat by China to sponsor a bigger rally.
       USDA released its first sunflower production estimate in the October report. Production for 2020 is 2.81 billion lbs, up 44% from the revised 2019 production of 1.96 billion lbs. If realized, this would be the biggest sunflower crop since 2015.  Area planted is up 10% from the June estimate and up 26% from last year. The October yield forecast, at 1,730 lbs/ac, is 170 lbs higher than last year’s yield and just one pound less than the record high national average yield.
* Mike Krueger founded The Money Farm, and is now a senior analyst with World Perspectives, a Washington, D.C.-based consulting company. While the information in this article is believed to be reliable, marketing involves risk, and the author and The Sunflower assume no responsibility for its use.
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