My blog last month ended with a warning that the summer high might have already been made. And here we are.
It is no secret that August has been a difficult month for grain marketing over the last several years. Penance for the year’s grain marketing sins is due, as unpriced basis contracts that have been rolled and rolled and rolled meet their end. Some producers received 70% of the value of grain that was delivered to the elevator up front and had until the end of August to price the bushels, but the amount received is actually closer to 85% of the value now that prices have dropped.
First Notice Day for the September futures contract is Monday, Aug. 31 and by-and-large the decisions regarding basis contracts and any other “price later” type of contract will need to be made by the close on Friday, Aug. 28.
USDA report looms
There is another potential problem with August, and it is USDA. If there is a compelling reason to reduce yield on the balance sheet during the growing season, USDA will not hesitate to make that cut early like they did in 2019 by dropping yield 10 bpa on the June WASDE report.
USDA had no problem chopping over 20 bpa on the July WASDE report in 2012 due to the drought. But when a crop is likely getting bigger, USDA typically waits until the August report to raise yield. In 2018, yield jumped 5 bpa over trend on the August report.
So, we must wonder: how big will USDA go next week?
Knowing that cash market influence will soon converge with USDA balance sheet reconciliation, I was compelled to see if there was a visible pattern to quantify how the month of August might go.
There have been several bear market years where corn was trending lower into the end of summer. What was the pattern in those years from the settlement the last day of July to both the settlement the last day of August and the lowest price traded during August?
Let’s get the bad news out of the way first. On average, December Corn settled 18.25 cents lower for the month of August and traded 29 cents lower than the July settlement price while on the August price low.
To compare, Dec ’20 Corn finished the week ending August 7 down 6.25 cents from July’s settlement price and has traded 7 cents below July’s settlement price.
It would appear likely that we have lower prices in store.
In half of the years sampled, the low for the month of August was made within the last few days of the month. The good news is there are a couple of years where the low for the month of August was made the day of the report and those years both presented a respectable rally. Whether or not this occurs next week, we are likely within 3-4 weeks of making a strong low once old crop bushels are gone and the September futures contract is off the board.
Challenging to the end
Clearly 2020 has been a difficult year. Unfortunately it is likely to remain challenging to the end, but I have a feeling that when we talk again next month there will be brighter days ahead.