Agricultural futures moved generally higher in October, but this past Tuesday felt like the culmination of some long-term rallies that had brought us some dramatic changes in calendar spreads, says Chad Burlet of Third Street Ag Investments, LLC.
The old-crop new-crop spreads in both corn and soybeans put in lows on August 12 and rallied sharply until October 27. The spread between December 2020 corn and December 2021 corn went from a 40-cent carry to a 27-cent inverse, and November 2020 soybeans went from 18 cents under November 2021 to $1.07 over. Not surprisingly, the spread moves were driven by strong rallies in the front end with corn rallying more than a dollar per bushel and soybeans rallying $2.27/bushel.
There were strong fundamental reasons for those rallies and the speculative community provided a very helpful tailwind. By the time the market reached its highs on Tuesday the managed money crowd had accumulated its largest agricultural long since 2012. In fact, there have been only three weeks in the past 14 years when they owned more agricultural futures and options.
The two dominant fundamental factors were dry weather and Chinese buying. Many key agricultural regions spent October hoping for rain including Ukraine, Russia, Brazil, Argentina, and the US Plains. It was relief in several of those areas that triggered the futures’ break at month end. Portions of Europe and the US going back into Covid lockdowns also contributed to last week’s bearish mood.
Strong Chinese buying of US soybeans had been expected this fall, but it has far exceeded expectations. The bigger surprise has been their purchase of 10-12 million metric tons (MMT) of US corn. The combined impact of those programs has put export sales of both commodities at record levels and has stretched the US exporting system to its limits. Fobbing margins, the difference between barge purchases and vessel sales, have approached $1/bushel, an all-time record. FOB cash basis levels in all major exporting countries are $1.50 - $3 over US futures.
Under normal circumstances those levels would convert back to prices that are far over delivery values in the futures market. However, the wide elevations and high transportation costs combined to keep cash and futures closely aligned for most of October. In fact, a 75% spike in Illinois River barge freight on October 29 took November CIF soybeans from delivery parity to 13 cents below futures in just a few hours. As a result, we’ve already had 520 contracts of soybeans registered and intentioned for delivery against November futures. With record unshipped sales of corn and soybeans it will be several months before we see this cost structure come down.
As we look forward, two of the most compelling questions are the total size of the Chinese soybean and corn imports. Both are being driven by China’s successful efforts to rebuild its pig herd. Not only is the herd already back to 84% of its former size, but a much higher percentage of the herd is on modern farms where they receive a higher protein ration. That, along with increased production of poultry, beef, and mutton has driven their monthly feed production to record levels.
Over the past six months China has imported over 56 MMT of soybeans. Despite that their port stocks are at a four-month low. Last week’s crush was reported at 2.2 MMT. We estimate Chinese 2020-21 imports at 106 MMT versus the USDA estimate of 99 MMT.
On corn the Chinese numbers are even more compelling. They’ve been on a multi-year program to draw down their record corn stocks, and it appears that they overshot their target. This spring and summer they sold 58 MMT out of government reserves and domestic prices rose steadily throughout that 15-week program. Then they issued special import licenses and public and private companies combined to buy 15-17 MMT of corn from the US and Ukraine. Now they’re auctioning wheat and rice to be used as feed. Despite that massive effort their cash corn markets remain between $9.50- $10/bushel, 30-50% above the prevailing world price.
The Chinese government has three possible solutions to their corn problem: 1) order the reduction of corn used for industrial purposes, primarily ethanol and starch; 2) further reduce their reserves of corn, wheat, and rice; or 3) allow more corn imports. The Communist Party is meeting now to prepare a new five-year plan. They have already made statements about increasing energy and grain reserves, as well as increased agricultural self-sufficiency. Those goals would seem to argue against options two and three and we see option one as highly unlikely. If more imports are allowed in the near future, they will come from the US. Another 5 MMT of US sales to China would trigger a massive acreage fight for next spring and would push nearby futures close to $5/bushel.
Learn more about Chad Burlet at Third Street Ag Investments
