Special Market Update
Grain Market Commentary
Monday, November 23, 2020
by Chris Hillburn, Senior Merchant, The Andersons
Overall corn and soybeans can be characterized as being driven by strong demand and South American weather questions.
Week starting out with the usual pattern, stronger on the overnight market and then tending to fade with a combination of producer hedging and a lack of big flash sales on corn exports. December 20 futures hit a new high of $4.2975, so $4.30 is still solid resistance. A close over $4.30 futures would be bullish per the charts. Since cash bids will roll to the March 21 contract in a matter of days, note that March 21 futures has closed above the $4.30 mark only one time so far in the uptrend. Bottom line is that a close or a couple of closes above $4.30 on March 21 futures is needed to start a new leg higher, with targets at about $4.45 to $4.64 per the charts. November WASDE ending stocks were 1.7 billion bushels, which was the level the market was trading prior to that report. Historical pricing models in the Modern Ethanol Era would indicate with a 1.7 billion ending stocks, futures should trade $4.20 to $4.30 range, so it appears that futures have priced in a fair value for now. Question then becomes will China import more corn and how much? Estimates out there for total China imports to be 20 MMt to as much as 30 MMT. This would be from all sources and currently the U.S. has about 13.5 MMT in sales to China. Another 5 MMT would take ending stocks down to 1.5 billion and open the way for another leg higher. Exports approaching 30 MMT would send ending stocks down to about 1 billion bushes and into rationing mode.
Good news so far is that it does not appear that higher corn prices have driven other corn importing countries to seek other origins or substitutes. In addition, the Wheat to Corn spread indicates not a lot of cheap feed wheat available to displace corn.
Biggest downside risk for corn still seems to be in the Macro Markets and the Corona Virus. Disruption of economic activity and major drop in oil prices/gasoline usage/ethanol demand is still possible with a shut down in the U.S. Economy. A major risk off trade in stock market and buying of the U.S. dollar would not be helpful to corn futures. Keep in mind that gasoline usage and ethanol production has still not recovered back to pre-Corona levels from last year, so the hope would be demand destruction would be more limited compared to last year. Still, estimates of lost demand from Ethanol Shutdowns would be at least 200 million bushels.
Last thing to consider is that grain markets always hit a top and the bull market will end. No one knows when and where that will be, Not selling corn or soybeans is a 100% risk/reward in the markets. Put options on basis contracts, minimum price contracts, and Min/Max contracts moves us away from that 100% risk reward to a revenue curve that protects against downside risk and still leaves the upside open. Always have a Plan B in place especially with profitable sales levels available.
100% risk/reward very much applies to soybeans as market touched the $12 January futures mark on the overnights. On weekly charts, we have a high of $12.08 from 2016 for lead month soybean futures. Beyond that, weekly charts are less helpful, as next point on the chart would be a $13.38 high in 2014. Classic weather market driven by South America which still looks dry, chances of rain coming up, but how much coverage and in what amounts? Been there, done that, got the T-Shirt. Looking back on some call options recommendations, those are paying off very well with a good price floor and calls well in the money. Weekly sales to China on the decline which is what one would expect as typically China front end buys U.S. soybeans in this time frame and then switches to South America in the Feb/March time frame. At this time cannot expect that to be different, but stay tuned to SAM weather.
As a historical guide to futures prices, take a look at a simple economic model of soybean futures compared to corn futures. March soybeans are trading at about $11.92 and March corn is trading about $4.32. That is an old crop ratio of 2.75. Historically it has been hard for this ratio to push to 3.0 or better, but it could happen. Typically either corn rallies to push that ratio lower or soybean futures drop to push the ratio lower. Simple economic models like this can help to filter a lot of the daily noise out of futures markets news, commentary, and opinions. No market year more noisy than this one. Protect the revenue curve and have a Plan B in place if the market does not rally to your expectations.