July started with a decidedly bearish tone as ideal May and June weather had been capped off by a very bearish USDA report on June 30. As we moved into July the weather turned dry and the pace of the price declines slowed.
Fortunately, below average temperatures and the lack of a blocking ridge kept rallies on the moderate side. Soybeans, with their important pod setting still weeks away, remained the most volatile of our three markets.
The corn market saw the biggest price decline, losing over 14% of its value. The United States, the world’s largest corn producer, pollinated its crop under the best conditions in a decade. With plant populations up and ears filling nicely, a record yield now appears almost certain. Also, China - the world’s number two corn producer - is on track to produce its eleventh record crop in the past twelve years.
Wheat had the second greatest decline with the Chicago contracts losing 8% of their value. Most northern hemisphere winter wheat has been harvested and yields were generally good. Likewise, spring wheat crops are well on their way to average or above average yields. The one concern about wheat is its quality. Europe is enduring a very wet harvest and as much as one-third of the French crop may be feed quality. It was noteworthy that no French wheat was offered on the most recent Egyptian tender.
As we said, the soybean market has been the most volatile of the three markets we trade. Not only do we have the all-important August weather yet to come, we are also in the final weeks of the tightest carryout in history. This has added significant spread moves onto the large flat price moves. The net result was a $1.82 trading range for August soybeans and an 8% drop in price.
The physical markets for all three of those commodities have been heavily impacted by transportation shortages and by export capacity that is fully committed for the fall. Those two factors have combined to create record FOB premiums, which is the cash basis in the export markets. Prices which have ranged from 40-90¢ over Chicago futures for the past decade are now an incredible $1.50-$2.00 over. The result has been to make U.S. grains and oilseeds less competitive in the world markets. It also has had a bearish impact on our futures prices.
On the transportation side one of the main culprits has been all of the crude oil, which is being railed out of central Canada and the north Central U.S. That has tied up a considerable amount of equipment and power and has driven rail rates through the roof. Barge rates quickly followed and the cost to move a bushel of grain from Chicago to New Orleans at harvest is now more than $1.35 per bushel.
Record export sales of soybeans and soybean meal have not only helped drive transportation costs they have also helped create a very profitable environment for exporters. With most of their fall capacity committed by mid-summer, exporters have been able to capture huge margins for elevating grain out of barges and trains and into ships. Elevations which had been as low as 5-10¢ per bushel are now 40-50¢.
The soybean market has a very interesting set up. Farmers have sold a record low percentage of the crop that is currently growing and, as we mentioned, overseas buyers have made record purchases of both soybeans and soybean meal. In fact, export registrations for soybean meal are more than double the previous record for this time of year. As a result, commercial grain firms are significantly short in the cash market and, for the first time ever, they are net long in the clearinghouse. We believe that with normal weather the soybean market will reset at a much lower price when farmer selling and export buying normalize.
We’re also bearish soybeans because we feel its price relationship to corn is unsustainable and that it has put us on a path to a record world carryout. Net returns for producing soybeans and other oilseeds far exceed the returns for producing grains and farmers everywhere continue to shift their production accordingly. Price direction in August will be dictated by U.S. weather. Once harvest begins and the range of production estimates narrows, attention will start to turn toward South America and the planting decisions that are being made right now.