Tuesday’s close in the grain market provided the best barometer of just how big a shock USDA’s Jan. 12 reports registered. Limit up moves in corn don’t happen often, especially in the dead of winter.
USDA’s move to cut 2020 corn production tightened projected carryout stocks at the end of the marketing year by another 150 million bushels. If realized, less than a 40-day supply of corn would be leftover Sept. 1, the least in seven years.
Number crunchers can quibble over details of the report. The government, for example, said higher prices will ration demand from livestock feeders, exporters and ethanol plants compared to its prior forecast. Questions remain about those assumptions for all three segments of usage.
Consider the ethanol outlook. Another report out Tuesday, this one from the U.S. Energy Information Administration, forecast a 5.1% increase in demand for the biofuel, not the 2% bump from depressed 2019-2020 levels seen by USDA. Export commitments in the first four months of the marketing year are running at a record pace that also projects higher than USDA’s new forecast. And apparent usage for feed in the first quarter implied by Tuesday’s Dec. 1 grain stocks was also larger than expected based on the government’s forecast for the entire12-month period.
This doesn’t mean the sky is the limit for corn, which has a “5” handle for the first time since 2014.
The new projected nearby futures selling range target kicked out by my pricing model is $5.32 to $5.87, a range that could be met with Wednesday’s expanded limits. If average cash prices for corn are a little lower than I expect, averaging $4.20 as the government projects, that range goes down to $4.96 to $5.42.
Tuesday’s rally brought corn within a few pennies of the 2014 high and met some other technical objectives on long-term charts as well. Previous rallies over the past six months have paused near these chart speed bumps before blowing through them. Chinese corn buying and the rally in soybeans provided the impetus for those moves, and could also be a factor in the weeks ahead to determine if the market has legs.
The news for soybeans Tuesday wasn’t as bullish, but it was still bullish enough thanks to a small cut in production and continued strong demand from crushers and exporters. This raised my projected selling targets for nearby futures to $13.01 to $14.02. March futures blew through that range over the past two weeks, capped by Tuesday’s 50.5-cent jump that also achieved several long-term chart objectives.
Whether beans can continue this run depends on the size of the Brazilian crop. USDA left its production forecast for the South American powerhouse unchanged. With harvest underway initial reports aren’t bad, but I continue to wonder about low Vegetation Health Index ratings in the key Mato Grosso state. This measure is improving with recent rains but remains below average levels.
Both corn and soybean futures are extremely overbought as measured by momentum indicators like the Relative Strength Index. That doesn’t mean they can’t go higher. But it is a caution sign. Big speculators have already placed a record bet on corn futures and their net long position in soybeans is also close to all-time highs. In a world flush with cash thanks to massive fiscal and monetary stimulus, there’s likely still money on the sidelines looking for a home. But $5 corn and $14 soybeans are lofty levels for sure.