August 31, 2018
The end of August marks the final day of summer, at least for weather forecasters. But for the markets the last two years it’s also been a pivotal moment. Corn made early harvest lows on the last trading days of August in 2016 and 2017, setting the stage for rallies into the following winter and spring.
Two years in a row doesn’t make for a statistically significant trend. But it was enough of a pattern to attract attention at a time of year when the market doesn’t have many fresh facts to trade.
Nearby corn futures took out lows made earlier in the summer on the final day of trading for the marketing year in both 2016 and 2017. In August 2016, new crop ending stocks were forecast to reach 2.4 billion bushels in the coming year, the most since the end of the 1980s farm crisis. In 2017, the situation didn’t look much better, with new crop endings stocks put at nearly 2.3 billion bushels.
Nearby futures took out lows made earlier in the summer in both years. Eventually the stocks situation turned out to be note quite as dire as predicted, helping the market hold those August lows on the next wave of selling at harvest.
The August low in 2016 was $3.01, and $3.285 in 2017. In 2016 nearby futures rallied 93.5 cents off that low. The move the following year topped out with an increase of 84 cents.
But this year, September futures was able to stay above its July low. Stocks look ready to tighten by 300 million bushels or more, a forecast the continuation chart reflects. September futures easily held above the July low of $3.2975, trading down to $3.4075 before closing at $3.51.
The optimism of this pattern was reflected by the attitudes of farmers about what to grow in 2019. Farm Futures first survey of planting intentions for next year showed corn acreage increasing nearly 2%, to 90.8 million. Farmers said they want to cut by soybean seedings by 2.3% to 87.5 million after planting more soybeans than corn in 2018 for the first time since 1983.
USDA forecasts soybean stocks will swell to 785 million bushels over the next year, a record surplus. Chinese tariffs further cloud the outlook for demand. Nonetheless, nearby futures in August were able to stay above July lows on the nearby chart, something they haven’t done since the 2012 drought year, when the market put in its all-time high.
That perhaps is a ray of hope the worst of the bean market is history. That thesis could be put to the test soon, when USDA updates its production forecast Sept. 12. With traders bracing for an even bigger crop than USDA forecast Aug. 10, the market could be poised decide if enough bearishness is enough.
Corn has followed wheat lately, and for good reason. Production of both crops around the world is falling due to weather problems in major exporting countries. That should help export demand. Still, corn exports have never topped 2.5 billion bushels and they likely won’t in the year ahead, either.
But lower world inventories of wheat helped boost U.S. prices because the market is a world stage. The same influence could help corn too.
In the meantime, growers face very weak basis in some areas, especially those influenced by the river system. The highest early September barge freight rates on the Mid- and Upper Mississippi River since Hurricane Katrina in 2005 caused shippers to lower corn basis to cover costs. Still, deliveries against September corn futures on first notice day were modest, 137 contracts, even though basis on the Illinois River was 18 to 53 cents under the board.
Weak basis and December to July 2019 futures carry trading at new highs are the market’s way of urging farmers to store. Most farmers will listen, helping the market recover once the crop is tucked away in storage.
Soybeans haven’t provided much good news for growers in 2018. But a funny thing happened on the way to the poor house: Many producers may eke out a profit on this year’s crops, even if China stands firm on its 25% tariff against imports from the U.S.
Most producers forward priced some of their production on the spring rally. Those who do have nearly half of their expected crop locked in, according to our latest Farm Futures survey. Add in Market Facilitation Program payments of $1.65 a bushel on 50% of their production, and these growers look likely to make a little money.
The key is to crunch the numbers hard now. Better than average yields should lower the cost of production. Basis collapsed in many places, but November to July 2019 carry in the futures market hit 49 cents into September delivery. Storage hedges on soybeans don’t normally work well but selling a post-harvest bounce could be a way to help insure that potential profits don’t slip away.
Wheat exports are off to a slow start, despite estimates of global production that keep ratcheting lower. Whether end users begin to get serious about securing supplies may depend on what governments in Russia and Ukraine due to limit exports from their disappointing crops.
Russian ag ministry officials met in August with representatives from the country’s livestock sector who are worried about high costs and limited supplies of feed. Officials next meet with exporters, amid rumors of a cap on sales. These same rumors surfaced from Ukraine, and every time they do, the market jumps.
U.S. stocks don’t look like they tighten significantly in the year ahead, because other countries are eager to sell off their surplus. But a rising tide of prices overseas could help lift U.S. futures to a test of August highs, a chance to hedge inventory and make more sales of 2019 crop wheat.
Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Advisor. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on www.FarmFutures.com he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.
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