Chad Burlet provide his monthly fundamental grain outlook.
All grain markets moved sharply higher in August, led by a corn, up almost 10%.
Difficult weather, acreage uncertainty and Chinese buying combined to move our markets sharply higher and to create wide price swings. November soybean futures carved out a trading range that was over a dollar per bushel.
On the weather front, Iowa was the epicenter of two destructive events: a derecho and a drought. A drought that began in central Iowa in July has now expanded to include most of Iowa as well as portions of eastern Nebraska and western Illinois. In addition, on the morning of Aug. 10, a storm formed in southern South Dakota and began to move east. By the time it reached Iowa it had become a derecho with winds over 100 miles per hour. It swept across the entire state, flattening millions of acres of corn. Even though three weeks have passed it’s still impossible to estimate the crop losses with any certainty.
As much acreage uncertainty as the derecho created, even greater uncertainty was created by the Farm Service Agency (FSA). The FSA processes all the paperwork relative to farmers’ plantings and their crop insurance. Every August through January, on the afternoon of the monthly World Agricultural Supply and Demand Estimate (WASDE), they publish the total number of acres that were planted and that were prevented from being planted. In a normal year, their August report will account for 95-98% of planted acres, but this year the Coronavirus pandemic forced them to extend their filing deadline from July 15 to Aug. 15. The acreage totals they released on Aug.12 were as of July 31 and they were an incredible 10.9 million and 7.9 million less than the USDA was using for corn and soybean planting, respectively. The great unknown is what percentage of that is due to delayed paperwork and what percentage never got planted.
While supply concerns managed to stabilize prices, it is China’s exceptional buying pace that has created the sharp rally. A few months ago, it was reasonable to expect China to buy U.S. soybeans for this fall, but their pace has been so strong that our new crop soybean sales are now a record for the end of August.
Even more surprising has been their record setting purchases of U.S. corn. China’s domestic corn prices have remained stubbornly high despite Sinograin auctioning off 55 million metric tons (MMT) of government reserves. Their profit margin on imported corn has been as high as two dollars per bushel. Like soybeans, they have driven U.S. export sales of corn to an all-time record for the end of August.
Even wheat is benefitting from Chinese buying. While their confirmed volume of U.S. purchases is modest, rumors of bigger U.S. purchases continue to circulate. More importantly, their total wheat imports this year are on a record pace. Some now expect them to utilize the entire allocation of Tariff Rate Quotas (TRQ’s). As part of their WTO Agreement the Chinese government has issued 9.4 MMT of wheat TRQ’s. Despite that, most analysts had expected only about one-third of those to be used. Their calendar year-to-date imports have already exceeded those initial estimates and some now believe they will use all 9.4. That additional 6 MMT would significantly reduce the available supplies in the major exporters and push more business into the U.S. After one quarter U.S. export sales are already up 7% versus a full year estimate of up only 1%.
We are now on the eve of harvest. The first few fields have been cut in the southern United States and yield reports are mixed. The concern is that this late dryness in the Midwest will hurt corn test weight and soybean pod fill. Many experienced crop watchers have cut their state-wide estimates for Iowa, Nebraska and Illinois by 4-8% over the past month.
On the demand side this price rally has not slowed China’s buying. Soybean purchases are announced on almost a daily basis and this morning the USDA told us that China bought 596 KMT of corn on Friday, even as our export prices reached new five-month highs.
A final contributing factor to the agricultural futures markets’ strength has been the weak dollar. The dollar index ended August at new 28-month lows. The idea of owning commodities as part of an inflation trade has been gaining popularity for the past few months. The Federal Reserve’s greater tolerance for inflation, which was spelled out by Chairman Powell’s speech last week, has only added more fuel to that fire.
Chad Burlet is Co-Founder (along with Bob Otter), Chief Trading Officer, & Principal, Third Street Ag Investments, LLC
