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Train Wreck in the Grain Complex

Quite the train wreck in the grain complex this week. No one wins a trade war, no matter what one individual might want us to think. Our self-inflicted trade war threatens huge swaths of our economy, with agriculture right in the cross-hairs.

Grain producers saw prices plummet this week as tariffs were put on Chinese imports, with China promising to retaliate in kind. Needless to say, agricultural products will be toward the top of their list, explaining why soybeans took the brunt of selling this week.

As the wheels come off our trade agreements, large traders don’t want to get caught with bullish positions, even if the fundamentals are strongly bullish – like for wheat and corn. But those two markets couldn’t escape the carnage as grain bulls headed for the hills.

USDA released the June supply/demand report on Tuesday, the only day that saw positive price action, and strong upward action at that, after the report was released. World stocks of wheat and corn – those that are available for export – are at multi-year lows. Stocks/use ratios, excluding Chinese stocks, are also at multi-year lows. The notion that the world is awash in wheat or corn is simply a myth. China is not going to export their grain stocks.

The report showed that U.S. corn ending stocks will decline considerably even with trendline yields. There is no room for any kind of a shortfall in corn production here in the U.S. That said, we’re already looking at a shortfall in Black Sea corn and wheat production with hot and dry weather shrinking production estimates from private analysts. The weather outlook there calls for a continuation of the dry pattern and now we see heat building in the region as summer sets in.

The dry region actually stretches beyond just the Black Sea. From Eastern Europe to Kazakhstan, crops are being stressed and production estimates are falling. Needless to say, this could be a huge issue if weather patterns don’t change soon.

Harvest is quickly moving through Kansas, with protein levels higher than normal. Commercials are eagerly bidding up for this higher pro wheat as they have large stocks of low protein to blend. Cash has been rallying during harvest, something almost unheard of most years. Basis levels in Kansas are actually positive in some areas, so clearly there is underlying support in the wheat market. But you wouldn’t know that looking at the futures charts.

Wheat support levels melted away this week, with prices taking out swing lows from early June. Corn and soybeans look worse with prices taking out winter lows. With no weather premium in the price structure for any of the grains, markets can quickly become vulnerable to adverse weather.

For wheat, the Black Sea weather is clearly adverse with no sign of improving at least for two weeks, well into the growing season. Corn and soybean growing conditions look mostly good so far, but there is plenty of growing season left for those crops here in the U.S. and across the Northern Hemisphere. This break in prices this week does offer some buying opportunities, particularly for call options for any potential weather play.

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