This is the SFN Market Report with Brooks Schaffer of Palmetto Grain. Reach him at brooks@palmettograin.com or 843-540-4540.
Since the first notice day lows, December corn has rallied 27 cents, November beans have rallied more than 60 cents and December wheat is up 50 cents. There are several factors contributing to the strength but the main fundamental driver is the hot dry finish to the crops in the Midwest. As recently as early August conditions were still optimal across most of the Midwest. As August has progressed, dryness has spread and several heat waves have set in. It has not really been seen in the condition ratings as they are not as useful late in the growing season. The plants are in full blown reproductive growth as they approach the end of their life cycle.
Throughout most of July the market was pricing in that big crops would get bigger. Then the August USDA report added a million acres and bigger yield to beans giving even more cushion and furthering the narrative that big crops get bigger. The ProFarmer tour was the first big event that found real threats to that narrative. They did find near record pod counts in soybeans, but noted stand issues in corn even in regions that were supposed to be the best. Pod counts are yield potential, not yield yet, and the hot dry finish to August means that at least some of that potential is lost. With the start of September comes a lot of private yield estimates with the big well respected trading and research firms. Many of them have also started reducing both corn and bean yields. Stone X was out on Thursday. Their corn yield was 182.9 which is 2 tenths of a bushel less than USDA’s Sept number of 183.1. Stone X’s soybean yield estimate was 53 which is 2 tenths of a bushel less than USDA’s sept number of 53.2. The magnitude of the difference is not quite as important as the direction of change. The market is starting to price in the possibility that the biggest yield estimates are now behind us. We get USDA’s latest estimates on Sept 12th, this coming Thursday, at 12 noon eastern. If we see confirmation of lower yields on that report too, the market will gain more confidence in this new narrative.
This shift in the fundamentals of the market on the supply side have also come at a good time for the market. We usually see a seasonal low in corn and beans sometime in September. Some people think that it will happen when the combines start rolling, but in many years we actually see the low put in before the combines start in earnest. A lot of spec money has good profits in their short positions and they see a threat to those profits if the seasonal low is behind us. That encourages them to buy back positions. We are also seeing an unwinding of the recent trends in other asset classes, with stocks and crude oil under pressure. A lot of the old crop selling is behind us now so the funds are natural buyers and there is no natural seller. That helps support the market. The rally we are seeing in wheat is also helping support corn. That has been led by strength in the Paris wheat contracts and gives participants confidence the seasonal low is behind us.
I think the market has given us a gift and we need to be at least be getting orders in. We are talking about trimming some off the crops but are still going to have a decent crop, it will be far from a disaster. In order to sustain the rally in the long term for corn and beans, we are going to need more help from production issues in other parts of the world. Beans need a major issue in Brazil. It is dry down there now, but it is called the dry season for a reason. The market will not start getting too concerned until Oct. They will not be late for a while, but it is not looking like they will be early.
The dryness has been so widespread that we are now already facing logistics issues due to low water levels in the Mississippi River.