Still forging on, grain futures have been fueled with friendly fundamental news to keep prices chugging higher. The surprisingly friendly Quarterly Stocks report and strong export demand continues to fuel higher futures prices and stronger basis levels throughout many parts of the Midwest.
Trade now gears up for tomorrow’s USDA report. This report has the potential to put a lid on this recent rally, or be a fundamental justification for “another leg up” for grain prices. We know we can’t outguess USDA reports, or how the market will respond.
That’s why it’s time to scenario plan for whatever unfolds from the October 9th report.
What is already priced in and expected?
Looking at pre-report expectations, trade is expecting to see lower yield for corn and soybeans on the report. For corn, the average yield guesstimate is 177.7 bushels per acre versus 178.5 bpa announced in the September report. The soybean yield is expected to come in at 51.6 bushels per acre, down slightly from the September number of 51.9. Because of these lower yield expectations, ending stocks are also expected to be lower for the 2020-21 crop year.
Ending stocks for 2020-21 corn are expected to be near 2.113 billion bushels, down from 2.503 billion bushels in the September report. Ending stocks for soybeans are pegged at 369 million bushels, down from 460 million bushels in the September report. These values are already priced in to the market. Remember, the perception that ending stocks are getting smaller is the catalyst needed for prices to move higher. The above information is already priced into the market. In order for corn and soybean futures to trade dramatically higher, ending stocks for corn and soybeans would have to be well below the above pre-report estimates.
It’s not just about yield
Demand for grain is also strong. Earlier this summer the Chinese buying had not occurred with the intensity of late. Low commodity prices, a lower U.S. Dollar, and the threat of smaller crops here in the U.S. and potentially in China provided incentive for China to be proactive in its buying needs.
U.S. export sales have been phenomenal, with many wondering if USDA will increase export demand in the upcoming report. Corn demand for export in September was announced at 2.325 billion bushels, increased from 2.225 from the August report.
Is another increase justified?
Soybean export demand in the September USDA report was pegged at 2.125 billion bushels, unchanged from the August number. Many feel this demand number may be increased as China continues to buy. Also, because the planting pace in South America is a bit slower than normal, that means they will not have very many early harvested beans available in January. That fact is also helping to keep the U.S. export buying at a swift pace.
Higher prices can hypnotize farmers
When visiting with producers about how to manage risk and capture opportunity from current markets, many are unsure of what to do. The hypnotic trance of higher prices sometimes compels producers to do nothing, and “wait and see.” The distraction of harvest, and working long days, adds to the haze. Tomorrow’s report may provide information that could justify corn futures to trade to $4.50 or soybeans futures to $11 per bu. But what if it doesn’t?
The funds are now near record long in soybean futures, and are likely long close to 200,000 contracts in corn. More legitimate bullish fundamental news is needed to justify another leg higher for prices. If that news is not delivered, a price washout could follow.
It has taken over five months to build this higher price in soybean futures, and nearly three months to build this higher corn price. Here’s something to think about despite your focus on harvest right now:
When beautiful gradual price rallies run out of steam on charts, prices have a tendency to cliff dive lower. And the free fall lower usually occurs over the course of a few weeks.
That’s when we hear, “I can’t make cash sales now, it’s a down day. I’ll just give it a day to see if price comes back up.”
There is potential risk to this market with lower prices, and there is the potential for reward with higher prices. You must manage both.