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Recapping a Tumultuous Summer in the Markets

Saturday, August 14, 2021
filed under: Marketing/Risk Management

By Mike Krueger*
        It has been a tumultuous summer in the markets.  The Northern Plains drought has decimated the U.S. spring wheat and durum crops, along with wheat crops across the Pacific Northwest.  It has been equally hot and dry across most of western Canada.  Canada’s crops have also been badly hurt, with wheat, barley and canola crops expected to be down 30% (or more) from early expectations.
        The hot and dry weather also extended into portions of the western Corn Belt. Weekly crop condition ratings have been consistently below last year and have shown no improvement through the mid-point of the growing season.
        The USDA has continued to forecast a record corn yield and the second largest soybean yield ever despite the problems across the western Corn Belt and Northern Plains.  The USDA will not adjust these yield estimates based on surveys, etc., until the August 12th report.  A more thorough yield estimate won’t be done until the September report.  That leaves a lot of uncertainty in the markets.  The big question is whether the potential for record corn and soybean yields across the eastern Corn Belt offset yield losses in the Dakotas, Minnesota and parts of Iowa and Nebraska?
        There have been numerous crop production issues in other key regions of the world too, including:
        •  Brazil’s Safrinha (second crop) corn was a disaster because of drought and several late-season freezes.  Brazil’s corn crop is likely down at least 25% from last year.  They are typically the world’s third largest exporter of corn, but they have been importing corn from Argentina.
        •  Russia has also had late-season hot, dry weather.  Analysts have been slowly trimming Russia’s wheat crop production estimates.
        •  The EU had a big wheat crop, but heavy rains and flooding across northern Europe caused yield and quality losses.
        •  Australia does appear to be on the way to a very good wheat crop, but their key growing season is September and October, so conditions must still be watched.
        All these factors make the U.S. 2021 corn and soybean yield and production numbers more important than ever.
        Aside from the yield questions, many analysts believe the USDA is understating corn and soybean export prospects.
        The USDA’s latest U.S. 2021/22 corn ending supply estimate is 1.4 billion bushels.  It could drop below a billion bushels if yields slip slightly and the export forecast is too low.  It could get bigger if the corn yield is a new record and the export forecast is too big.
        The USDA — and other analysts — have doubted the Chinese would take all of the corn they purchased this marketing year.  It is now a certainty that China will take what they have purchased.  Corn loadings to China have been big recently. China also already has 450 million bushels of new-crop corn purchased.
        The U.S. soybean outlook is equally precarious.  We will finish the current marketing year (August 31) with minimal soybean supplies.  The outlook for the next marketing year is equally tight even if we manage to have a near-record soybean yield.  Compounding the tight soybean issue is the fact that Canada’s rapeseed crop will be much smaller than expected.  That will limit their export capacity.
        Wheat has long been the weak sister in these markets with big world supplies and several years of record production.  Big production cuts among the major wheat exporting countries have quickly changed the wheat picture from neutral to bearish to somewhat bullish.  Canada’s wheat exports will have to be far below early estimates or they will run out of wheat.
        The world spring wheat balance sheet has gotten very tight.  Rationing will be required.
        It will all again come back to China and what China’s import demand for oilseeds, corn and wheat will be in the next marketing year.  There is no reason to believe China’s appetite will decline and several reasons to believe it will get bigger.  Hog herds continue to expand as does their economy.  The USDA has failed to lower estimates of China corn and wheat stocks despite overwhelming evidence they are far too large, especially corn and wheat.
        There are two major issues that will drive these markets over the next several months:
        •  Realized U.S. corn and soybean yield and production estimates.  Any decline from the record yield estimates will mean smaller ending supplies.
        •  Export activity for U.S. corn, wheat and soybeans.  We expect current projections are too small based on the production issues outlined above.
        You can’t talk markets without talking about the big speculative funds. They are a powerful force in these markets and have a very short-term trading horizon, often minutes and hours, not days and weeks.  This creates tremendous volatility in a period of strong demand and tightening supplies.  Expect this volatility to stay with us.
        Production prospects in Brazil and Argentina will be critical because of the issues around the Northern Hemisphere. Argentina was dry last season and is still dry today.  Southern Brazil is also still dry. There has been chatter that wheat production in Brazil and Argentina has been hurt by frosts in Brazil and dryness in Argentina.                                                                                                                                                         
         * Mike Krueger founded The Money Farm, and is now a senior analyst with World Perspectives, a Washington, D.C.-based consulting company.  While the information in this article is believed to be reliable, marketing involves risk, and the author and The Sunflower assume no responsibility for its use.
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