Tuesday’s bullish USDA crop reports – and the equally bullish reaction of grain markets to the news – are yet another reminder it’s never a good idea to get either too negative or too positive in your outlook for prices.
Keeping a cool head was never more important than in 2020, a year that’s already produced incredible shocks. And the year isn’t over yet. While the calendar flips to 2021 on Jan. 1, the 2020 crop selling season still has months to run.
The historic fall rally is giving growers a chance to take the money and run – all the way to the bank with a profit. Still, with markets on fire, it’s only natural to wonder if these moves have another act.
How we got here
Betting on more after benefiting from major gains already raises the risk of being too bullish, though there is some cause to hope the rally will continue. Before tackling that question, it’s worth remembering how we got here in the first place.
For perspective, I dusted off my presentation from “The Great Grain Market Debate” Farm Futures sponsored at Commodity Classic on Feb. 27. This, of course, was one of the last big gatherings held in the country as the pandemic was already beginning to send markets sharply lower.
Even before we all learned about COVID-19, the mood wasn’t encouraging. Indeed, I had trouble believing it at the time, but my research showed potential for rallies. It’s one thing to look at the market in February, when fields are bare save for stubble and cover crops.
But even when it looks unlikely, history shows markets have a way of rallying thanks to weather uncertainty.
Even with average weather, these models suggested corn futures could rally to $4.45 to $4.65, with soybeans having potential for $11.25 to $11.50
I updated these forecast for the Farm Progress Virtual Experience in September, suggesting a corn selling range of $4.07 to $4.31, with soybean targets at $10.45 to $11.26.
December futures hit $4.2725 on Tuesday, with January soybeans reaching $11.5325.
What looked impossible eight months, or even eight weeks ago, has happened.
So what happens next?
Odds of a corn rally into the end of December are only around 40% historically. Soybean chances are only slightly better than 50-50.
“Bulls must be fed” according to market lore, and recent history over the past decade shows how. Years with large gains after the November USDA report tended to benefit from shrinking estimates of carryout. Official projections for marketing year ending stocks on Aug. 31 can drop due to lower production estimates in January or improving demand prospects into the winter and spring.
The Nov. 10 update for corn featured both. Production fell 215 million bushels due to lower yields. The current estimate of 175.8 bushels per acre is just 1.3 bpa higher than the last projection from my models based on those oft-criticized weekly crop ratings.
Record corn exports?
USDA’s forecast for record corn exports of 2.65 billion bushels upped the agency’s guess by a whopping 325 million bushels due to a surge in Chinese purchases. Whether the government is too optimistic is likely the biggest question mark hanging over corn’s direction headed into 2021. Even record early commitments for corn to all customers suggest the government may be too high. But an improving Chinese economy may need to keep buying to feed a resurgent hog industry recovering from swine fever.
USDA slashed its forecast for soybean ending stocks to just 190 million bushels, with almost all of the reduction coming from a 98-million bushel cut in the size of the crop. Chinese demand is a wild card for soybeans, because the pace of sales so far suggests USDA may be low-balling its projection. But an even bigger question for soybeans comes from Brazil. USDA left its forecast for Brazil’s crop unchanged at a record 4.9 billion bushels. Stress remains across parts of Brazil’s growing region, with the Vegetation Health Index rating last week pointing to potential for yield losses of 10% or more if rains don’t improve. Weather forecasts remain optimistic, especially in the second week of the outlook, but haven’t brought needed relief yet.
The bullish numbers from the government fueled an increase in the selling targets produced by my price forecasting models. The new soybean range is from $11.55 to $12.45, with corn rising to $4.47 to $4.82.
Meeting these lofty new goals likely will take more friendly news from USDA that convinces big speculators to double down on their net long positions. Hedge funds hold near-record bullish bets on both corn and soybeans already.
Money is cheap these days, so these players could conceivably keep the pedal to the metal. But before holding off on sales, make sure you can afford to buckle up for the ride.