Grains tumble on improving August weather
As weather has improved significantly in the western Corn Belt in August, grains tumbled lower last week and maintained most of these losses this week.
The best rains in weeks have fallen in IA, MN, Dakotas, NE, and KS/HRW country this month, with more forecast to fall again in the next 5 days. That has given speculative shorts more boldness to sell short this market in spite of the June/July dryness. That doesn't mean that the hot/dry weather of early summer didn't hurt crops. It just means the negative impact of adverse weather might be over.
Pro Ag yield models for corn have improved about 3 bu/acre during August so far, with soybeans up a more aggressive percentage with 1 bu/acre improvement during August. This has pressured prices a great deal, with both Nov. soybeans and Dec corn pushing to new recent lows. It's hard to imagine that this small improvement can eliminate all the bullish enthusiasm the market had earlier this year, but that is exactly what is happening!
While corn ending stocks are still forecast to drop almost 1 billion bu this year, prices are really almost the same as last year at this time ($2.35-$2.40 Dec futures) and in the bottom 25% of historic prices. This is not very impressive considering 1 month ago the market was worried about running out of in the 2007/08 marketing season. So why the big change?
The market is always looking ahead, and with improving weather the market is starting to anticipate a continuing improvement of crop conditions into harvest. Given the pace of current yield improvements (1.5 bu/acre/week), the market might be anticipating a hike in corn projected production of another 400-500 mb or more by the Jan report, with it going directly to ending stocks. That cuts in half the anticipated cut in ending stocks from last year to this year and also buys twice the time for the market to adjust to biofuel demand. Anyway, why worry about supply shortages with 11 billion bushels of grain on hand in the US for the next few months? Correct or not, that's the market assumption today.
For soybeans, the market seems to believe the great advances in yield potential the first 2 weeks in August (1 bu/acre by Pro Ag yield models) will continue through August and into early September. Our yield model implies about a 40.6 bu/acre crop so far, with huge strides in yield potential the last 2 weeks. The market seems to be assuming the same type of recovery as in 2005, with a record yield still possible. But, if soybean prices could only drop to $5.50 last year on record large carryout (and production), how much can it drop this year? Especially with crude at $70 and biodiesel demand exploding worldwide?
The market is trading like yields will actually end up at 158 bu corn and 42.5 bu soybeans right now, with the beginning of the 'big break' already started 2 weeks ago. Typically, that continues into harvest. So, can we hit $2.20 Dec corn and $5 Nov. soybeans by harvest? If we do, we'll need to see a final corn yield of 158 bu/acre corn and 42.5 bu beans to support prices that low even as harvest lows.