In June, corn, wheat and soybeans each charted a very different course until the final day of the month. It was at that point that the most important USDA report of the year confirmed a very different fundamental picture and sent all three markets sharply lower.
Wheat
Wheat (CBOT:W) was the only trending market of the three. During May, the market had accepted the reality of a poor U.S. HRW crop. June was a month of exceptionally good weather in virtually every wheat-producing area around the world. With Russian and Ukrainian hostilities diminishing, the Black Sea quickly took on the role of downside price leader. Despite SRW futures ending June 10% cheaper than May, U.S. cash wheat was no more competitive than it was a month earlier. In the Egyptian tender earlier this week, U.S. wheat was still $25/metric ton above Russian and Romanian wheat.
U.S. SRW harvest is now underway. Excessive rain has delayed the harvest and is also adversely impacting quality. Test weight is light and vomitoxin is frequently being found; hopefully quality will improve as the harvest moves further north.
Because of this uncertainty, wheat calendar spreads have become extremely volatile. The July-September spread on the CME traded from 8-1/2 to 2-1/2 and back to 8-1/2 in less than 24 hours. The market is trying to sort out whether the delivery market will be holding some of the better quality wheat (including old crop) or whether warehouses will be using vomitoxin as a poison pill to discourage potential stoppers.
We will avoid a flat priced long until world prices have bottomed. If Russia were to set an intervention price, we would find that particularly important. A continuation of a poor monsoon in India would also be supportive.
Corn
The rain that was hampering the U.S. wheat harvest has been nearly ideal for corn (CBOT:C). With the exception of some isolated flooding and wind damage, the corn crop is off to one of its best starts in decades. In addition, U.S. farmers still own a considerable quantity of old crop corn. The USDA stocks report confirmed farmers sold soybeans and stored corn. It also confirmed June 1 corn stocks were more than a billion bushels higher than a year ago.
With pollination beginning under good conditions and forecasts remaining favorable, the opportunities to hurt the crop and rally prices are diminishing. As the market moves lower, we’ll start to find more price support from end user hedging. Both the feed and ethanol sectors are enjoying exceptional profitability and should be willing to lock in margins as the opportunities are presented.
USDA report
I have long considered the USDA’s June 30 report to be the most important government report of the year. Its June 1 stocks numbers provide the most definitive word on the size of the previous year’s soybean crop and also on the current year’s domestic corn feeding. In addition, its acreage numbers are the cornerstone of every balance sheet that will be prepared for the next seven months. Even with all of that, there has never been a June report with more price impact than this year’s report.
Soybeans (CBOT:S) were by far the greatest beneficiary of this year’s report. Not only did the USDA confirm last year’s crop has been under-stated by 50 to 60 million bushels, but they also added 3.3 million acres to their March planting estimate. The result was a near record one-day price move. For the first four weeks of June, November soybean futures had a 45 cent trading range. On report day, they had an 85 cent range, almost all of it to the downside.
Along with providing an excellent trading opportunity, the report confirmed U.S. farmers and markets in general remain economic. That was particularly reassuring after several months of dubious government reports and puzzling price action. Going forward, we see continued opportunities in the price relationship between corn and soybeans. The impact of overpriced soybeans on planting decisions has been confirmed. Over the next several months we’ll see its impact on demand.
We also think China’s transition from a soybean support price to a target price will help create more of a free market system. Our overall flat price bias remains bearish as global acreage and yield expansion comfortably exceed demand growth unless multiple regions experience severe weather damage.