A bullish mentality is setting in, analyst says

A smaller U.S. corn yield estimate is giving the bulls fodder to chew on, analyst says.

We seem to have developed a bullish mentality in the marketplace now, after six years of extremely bearish sentiment.  

For some reason, on August 12, when USDA told us we'd never have to worry about a shortage of grain again, prices started to go up. And go up they have ever since that time, with over $5+ gains in soybeans and about $2 in corn.  

Not bad for just a few months! 

A lot of very good things have to happen to cause that, and a great factor is the almost reckless spending the U.S. government has adopted due to the pandemic. Both monetary policy (0% interest rates for another three years?) and fiscal policy (spend like a drunken sailer) are expansionary.  hat means inflation, or more accurately for now, maybe stagflation. Look up that word – understanding the definition will be important the next few years to your success.

The USDA report Tuesday gave some bullish fodder for traders to chew on, with the biggest surprise the yield reductions in corn/bean crops (-3.8 bu/acre corn and -0.5 bu/acre soybeans). Pro Ag has been saying since November that soybean yields were at least 0.5 bu/acre too high yet, but the corn reduction was a surprise to everyone. Corn goes limit up 25¢ yesterday, and trades another 8¢ higher in synthetics, only to see that expand to +17¢ in overnight trade for a net gain of 42¢ in 24 hours.

READ MORE: USDA tightens the U.S. corn, soybeans stockpiles

USDA scrambled to come up with soybean carryout stocks, using the unusual category, “residual,” to add 13 mb to the ending stocks number, and 20 mb in imports to keep carryout at 140 mb (about 5 mb more than some traders expected).  But where are we going to import soybeans from? If SAM has a bad crop as projected, China may have already bought most or all of it. So do we buy it from China? The desperate attempts by USDA to keep carryout at 140 mb were obvious to traders, especially when they are hiking price already substantially in both corn (+20¢) and soybeans (+60¢) to ration supplies. In soybeans, the net production cut by the yield reduction was 35 mb, and with hikes in exports (30 mb) and crush (5 mb), they had no choice but to use fudge factors to manipulate the numbers to look better or they would have been at 105 mb carryout (which still is too high in reality). Notably, USDA did not reduce Brazil's 133 mmt soy production number, even though many are talking in the mid-120s already. There's a lot of work to do here yet, especially when you consider USDA cut Argentina only 2 mmt to 48 mmt (and more is to come there yet based on private estimates).    

Corn also had a bullish report, but not by reducing SAM crops significantly as expected, but instead reducing U.S. crop yields 3.8 bu/acre to 172 – a shockingly high reduction this late in the crop year. Boy, USDA really laid an egg in the August report with huge production hikes to record large yields, forecasting a giant/bumper crop. In hindsight, it’s been reversed every month since then to now a below-trend yield, which means whatever method they used to forecast in August should be abandoned forever as it was a huge error!  

The 325 mb reduction in yield meant USDA had to concoct an assortment of rationing measures including hiking price projections 20¢ to $4.20, reducing feed 50 mb, -100 mb ethanol, and -100 mb exports to arrive at only a 150-mb reduction in stocks to 1.552 BB. But that is a facade, and traders well understood it; even though stocks were only 45 mb below traders expectations at 1.552 billion (vs.1.597 bb expected), prices went limit + up anyway. The problem comes in the world numbers, as USDA only cut Argentina production 1.24 mmt, and Brazil 1 mmt from last month despite adverse weather that has private cuts two to four times larger than USDA's. So more bullish information is yet to come.

READ MORE: Highest corn and soybean prices since commodity boom, says USDA

Wheat had mixed numbers, with winter wheat planted acreage larger than expected at 42 million acres (+.6 million from expectations, +1.6 million from last year), but at current price ratios, more acreage than normal will be grazed out and planted to corn/soys. I would not be surprised to have 1 million less winter wheat acres harvested than 2020. Wheat ending stocks were cut 25 mb as we have to feed it given the tighter corn stocks; that led to a 25 mb reduction in ending stocks, more than the 5 mb reduction expected.  Wheat is still following corn/beans higher, not leading, as corn/beans are bidding wheat acreage away to other alternatives – and that is the most bullish thing wheat has going for it.   
 
Weather forecasts continue to suggest better weather in SAM, especially in Brazil where above normal precip and below normal temps are forecast for the next seven days. Argentina also will see normal precip and temps the 
next seven days, but will turn less favorable in the eight- to 14-day forecast with mostly above normal temps and normal precip. So, while weather is improving, there still might be some stress in Argentina. However, the improving forecast the next seven days also suggest a weather pattern change might also be in the offing.    


Ray can be reached at raygrabanski@progressiveag.com.  
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Ray is President of Progressive Ag Marketing, Inc., a top Ranked marketing firm in the country.  See http://www.progressiveag.com for rankings and link to data from Top Producer Magazine and Agweb.com. 

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