This is the SFN Market Report with Brooks Schaffer of Palmetto Grain. Reach him at brooks@palmettograin.com or 843-540-4540.
This time feels different. It is not surprising to see the trend change around the July 4 holiday. We came into the big reports at the end of June with the bears fully in control of the grain and oilseed markets. The funds were aggressively selling corn, beans and wheat, and we had dropped dramatically off the spring highs. Everyone was geared up for big crops and bearish USDA reports at the end of June. Then neither the stocks nor acreage reports were bearish. The forecast was calling for some extreme heat, but it was only expected to last a short period, and some of the Midwest crops needed some heat units, so the market was not concerned. Then, after the July 4 holiday weekend, the market jumped higher and really has not looked back much since. When the market is falling, it seems like every headline that comes out is bearish. Now it is like everything is bullish.
The rally started, as most summer rallies do, with weather. The market was fine with a week of heat to help advance the crop. But around July 4, the models started extending the heat and dryness to some regions for several weeks. That started some buying and confirmed a key reversal higher in the market. Once the key reversal happened, we started seeing some Chinese buyers come in and start buying U.S. new-crop beans. They had been on the sidelines as the market was falling, but once they felt we had seen a low, they all came in at once, which pushed the market even higher. Then wheat started taking the lead as Russia and Ukraine started pounding each other’s grain infrastructure, which they had refrained from hitting earlier. A well-respected analyst estimates Russian export capacity is down by at least 30%. This week, Russian missiles hit an ADM export facility at Odesa, Ukraine. As wheat has rallied, it has pulled corn with it. The crops in the EU also continue to deteriorate as they have faced extreme heat and drought. While France is not a major exporter of corn, the balance sheet is tight enough that any losses in production are going to have a real effect on world carryout. Meanwhile, the forecast in the U.S. is pointing toward decent rains in the Eastern Corn Belt but continued dryness in the West. While most analysts still believed we had full yield potential in the U.S. at the end of June, many are revising that now. As hostilities increase again in Iran and energy prices rally, the inflation trade comes back into the headlines again. That brings institutional money back in on the long side, adding to bullish momentum.
We very rarely make it all the way through a U.S. growing season without some kind of weather scare. More often than not, it is just a scare, and the market runs up, then falls just as quickly when the weather threat dissipates. With this rally, there is more than just weather the market is trying to price in. That does not mean it cannot fall quickly. Right now, we are benefiting from the fund money flowing into commodities. If something changes dramatically with one of the bullish factors cited above and it turns the flow of money, we will drop just as quickly. You need to get orders working so that, if it runs up to your objective, it will fill. You do not have to price your whole crop at one time, but we have been given a gift. Take some risk off the table. There is still a lot of upside in these markets if China keeps buying beans, the weather remains threatening and clips U.S. yield, Russia and Ukraine continue to knock out each other’s infrastructure, and/or European crops continue to get smaller, but there is also downside if they do not. We know how quickly the markets can turn.
The corn crop in the Southeast will be smaller than last year. There are some areas that were hit harder than others with the hot, dry weather this summer. Basis, on average, should be better, but it may still come under pressure when corn harvest first gets started. But basis should rally quickly as the harvest pressure falls off.