Corn

Net change for the week:

Sep corn: 4.02 down 8 1/2

Dec ‘24: 4.14 3/4 down 9 1/4

The July WASDE report was released today. The July report does not usually contain anything too shocking, and this year’s iteration was no exception. But it did contain a curiosity; one that, perhaps, will reduce the downside potential in this market.

Traders tend to ignore the old crop supply and demand projections once the USDA starts releasing new crop estimates in May, but old crop is where the surprise was found. In the 2023/24 demand projections, the USDA raised its export projection by 75 million bushels, which I have no problem with. But they also raised the “Feed and Residual” line item by 75 million bushels compared to last month. The puzzling thing about this is that, in the June 28 Quarterly Stocks Report, the USDA’s June 1 stocks total was 120 million bushels higher than the trade expected. Since ethanol usage and exports are easily tracked, the Quarterly Stocks Report can be used to approximate how much corn has also been used for feed. For example, if stocks shrank by 3 billion bushels in a quarter, and ethanol and exports were known to have accounted for 2 billion bushels of that disappearance, then the other 1 billion bushels is assumed to have been primarily feed usage. June 1 stocks were reported to be 120 million bushels higher than anticipated, which implies that feed usage had dropped during the previous three months. But in today’s report, the USDA went the other way, and increased feed usage rather than cutting it. This makes no sense, and suggests we are going to see a revision somewhere in a future report.

But that’s in the future. Today, this peculiarity helped reduce old crop ending stocks by 145 million bushels. And since old crop ending stocks become new crop beginning stocks, this took 145 million bushels off of the new crop carryout as well. Otherwise, the new crop ending stocks would have been decidedly more bearish than they were, considering that the USDA added in the extra 1.5 million acres than showed up in the Planted Acreage Report. They increased new crop feed usage and exports as well. The bottom line was a 2.097 billion bushel ending stocks projection, which was 215 million bushels less than the average trade guess.

December corn finished the day up four cents, which is a very subdued reaction to a bullish number. To some degree this likely reflects some skepticism about the USDA’s projections. But also holding the market back is the fact that it is mid-July, and Midwest weather is seen as bearish.

As a rule of thumb, if a weather rally is not underway by the weekend after Independence Day, there probably isn’t going to be one. If there is, it will likely be much smaller and shorter-lived than if it had started in May or June. In recent days the wettest area of the Corn Belt got the sunshine it’s been needing, while the driest areas got a good soaking from the remains of Hurricane Beryl. A period of above-normal temperatures combined with below-normal precipitation will prevail into the middle of next week, but crops in the Midwest have subsoil moisture to draw on and will be just fine. Yes, there are areas where crops have been flooded out, and also areas that needed rain and missed it. The weather is not perfect everywhere, but it never is, and it does not have to be to produce a record yield.

And record yields are currently looking more likely than not. As of Sunday, 68% of the crop was rated in good or excellent condition, and that was before the rain in the dry Eastern Corn Belt. This week’s Drought Monitor reported that only seven percent of US corn production comes from areas currently experiencing drought, and that was before the remnants of Beryl had finished passing through the Corn Belt, so this percentage will be even smaller next week. This crop is not in the bin yet, and I’m well aware that rare events like an early freeze or a massive derecho can happen. I’m also aware that if hot, dry weather prevailed in the Midwest for the rest of the summer, current subsoil moisture won’t take the crop all of the way to the finish line. But the first two possibilities are huge long shots, and the last one is not currently in the forecast. This crop is on track for a national average yield of trend or above, and the trend is 181 bushels per acre. Unless those yield expectations come back down again, there will be willing sellers anytime the market sticks its head up.

The yield outlook is not the only reason that I’m bearish on this market. A recent Bloomberg News story noted old crop corn stocks in producer hands are at their highest level since 1988, and it’s the middle of July, basically just six weeks away from harvest. Today’s report suggests that perhaps farmer inventory is not as massive as the Bloomberg article says, but there remains a large supply of old crop corn out there. Those bins have got to be cleaned out for the next harvest, and the price on those DP contracts has to be set by end of August. The markets can sniff out weakness, and a huge pile of old crop corn that everyone knows has to be dumped onto the market in six weeks is an incredibly weak position. The end users know that corn is there, the grain companies know that corn is there, the funds know that corn is there, and all of them expect most of it to be liquidated in the next six weeks. Human nature being what it is, the majority of producers holding that grain will probably wait until they simply can’t wait any longer before selling or setting a price, with the result that much of this inventory will be priced in the second half of August. The tight farmer holding has basis levels quite strong now, but I will be surprised if the basis doesn’t start to crumble in the near future. End users will buy hand to mouth, and as soon as they think they have enough inventory to get them to new crop supplies, they will cut their bids and wait it out.

Perhaps I will be proven wrong about all this, but I’ve seen this movie before. The textbook example is 2016. September 2016 futures topped out on July 11 and began to work lower. On August 10, the selling accelerated, dropping relentlessly until the lowest price of the marketing year was set on August 31.  The shorts smelled blood in the water, and farmers who had been holding tight for 11 months finally capitulated the last week of August. That corn changed from producer hands to commercial hands at the worst price of the entire marketing year. I see the potential for a similar scenario to play out again this year.

Maybe I’m wrong; it wouldn’t be that unusual if I am. Maybe today’s report is evidence that I’m totally off-base with this idea.  We’ll know in six weeks. But a four-cent gain from a bullish report, while the funds are heavily short, is not an impressive exhibition of strength. If the September contract ever closes under 3.94 1/2 on a weekly basis, the chart says 3.50 is in play.

Soybeans

Net change for the week:

Aug: 11.05 down 61 1/4

Nov ‘24: 10.65 1/4 down 64 1/2

The USDA trimmed old crop ending stocks by 5 million bushels, which is a small amount that I won’t waste time writing about. In new crop, planted area was reduced by 0.4 million acres to reflect last month’s Planted Acreage Report. The yield projection remains at 52. Beginning stocks were 5 million bushels lower. No changes were made to any of the demand categories. The bottom line is a 435 million bushel ending stocks projection, which was 14 million bushels less than the trade guess and therefore a little bit friendly.

But one could also argue that it is overly optimistic with regards to export demand. The USDA sees exports increasing by 125 million bushels in the new marketing year. There is room for improvement, as our old crop export sales are currently running at their slowest pace in ten years. But cumulative new crop sales are only 3.2% of the USDA’s forecast, which is the smallest percentage for this date in 24 years. China finally booked their first new crop bushels this week with a 132,000 tonne purchase, but the market yawned in response, because a year ago at this time, the Chinese had already bought 1.72 million tonnes. There is plenty of time for sales to improve, but if they don’t the USDA is eventually going to be forced to add bushels back into the balance sheet.

This report will be forgotten by Monday. It’s the middle of July, and the primary influence is weather. So far, so good, as 68% of the crop is rated as good or excellent, and no major threats are currently in the forecast. Only 8% of soybean production comes from areas currently in drought, and that number will shrink next week, thanks to Beryl. Beans are made in August, so the trade is unlikely to take all of the weather premium out of the price quite yet. But with no current weather threat, the path of least resistance is down, and August isn’t all that far away.

Wheat

Net change for the week:

Sep KC: 6.67 3/4 down 31 1/4

Dec: 5.86 1/2 down 29 1/2

Sep SRW: 5.50 3/4 down 39 3/4

Dec: 5.75 3/4 down 37 3/4

Sep Minneapolis: 5.97 1/2 down 35 3/4

Dec: 6.17 1/4 down 33 3/4

Today’s report was flat-out bearish for wheat. New lows for the year are coming.

All wheat production was pegged at 2.008 billion bushels, up 133 million from last month and 99 million more than the average trade guess. Winter wheat production of 1.341 billion bushels was 25 million more than the trade guess. Hard red winter production was reported at 763 million bushels; 20 million more than expected. Spring wheat came in 57 million bushels high at 578 million bushels. Only soft red winter, at 344 million bushels, avoided coming in higher than anticipated.

In the S&D table, the USDA increased harvested area by 0.8 million acres while also raising the average yield from 49.4 up to 51.8. On the demand side, feed usage was bumped up 10 million bushels, and exports by 25 million. The net result of all this is an 856 million bushel ending stocks projection, which is 98 million bushels more than last month, 68 million more than the average trade guess, and the largest carryout in five years.

The global numbers were bearish as well. Stronger production in the US, Canada, and Pakistan more than offset reductions in Russia and the EU. World ending stocks are now seen at 257.24 million tonnes, up 4.97 million from a month ago. The trade was looking for a small reduction instead.

I once thought that the market was ready for a moderate post-harvest rally, but I’ve given up on that. News that Ukraine had detained a cargo ship and its crew, accusing them of transporting stolen Ukrainian grain for Russia, give the market a one-day bounce of more than 20 cents on Thursday, giving my consulting service customers a fortuitous opportunity to sell remaining cash wheat before today’s report was released. The chart no longer looked good to me, and I advised them to let it all go. Some of those bushels had been hedged in July of last year with option spreads that had a floor price at 8.50. We sold and hedged more in April, and again in May. If you did nothing ahead of time and are now holding on praying for a recovery, give me a call sometime. There are better ways to market than just hoping it all works out. It’s better to get something done before the price falls and then be done with it after harvest, rather than waiting until the market is down and then trying to hang on as long as possible after harvest is over.

If you are hesitant to sell because you think you might be selling the low, I can discuss reownership strategies with you. Simply buying call options is an expensive way to go, and I’ve got suggestions on how to make reownership more affordable. But frankly, I think you may be throwing good money after bad. If your plan is to just hold on to cash wheat for a few months and wait for the market to improve; it might. But the odds aren’t in your favor. I watched a KSU webinar earlier this year that looked at 15 or 20 years of history to see how often storing wheat after harvest was profitable. It hardly ever was, even when storing on-farm, and higher interest rates make it even harder. It’s throwing good money after bad. Focus on pre-harvest sales, not post-harvest reownership or “storing and ignoring.” And don’t be afraid to start early.

Case in point: my consulting service clients took their initial 2025 wheat coverage over 2 months ago, and now have a floor price in July 2025 futures at 7.00, which is more than 88 cents higher than today’s price. It was a three-way option spread that only cost us one lousy penny to do, giving us a dollar of downside protection and a dollar upside room 13-14 months in advance of the 2025 harvest.   Many people who would never, ever consider spending a penny to protect the downside a year in advance will be perfectly fine spending 35 cents or more to buy back bushels back after harvest. Why not consider selling or hedging a few bushels before the price falls, instead of hanging on after the damage is done?

If you have wheat stored on-farm, consider selling March KC 6.50 calls against that inventory. These closed today at 29 7/8; which I’ll round up to 30 cents for simplicity. If March futures go over 6.50 and stay there, you have an obligation to be hedged at 6.50. But that’s about 48 cents better than today’s price, and the 30 cents is yours to keep, which would effectively make it a sale 78 cents above current prices, minus transaction costs. If the market remains under 6.50 instead, the calls will expire worthless in February, and you would at least have 30 cents more than you would if you did nothing at all. Be aware that this strategy limits how much you can make if case something sparks a bull market, and it is a marginable position. This is about selling calls, not buying them, and so margin calls can happen. But it’s a good thing if that happens, not a bad thing, because you will make more money with this strategy in a rising market and margin calls than in a down market with no margin calls. Stop thinking in terms of the 1099, and start thinking in terms of the Schedule F.

Cattle

Net change for the week:

Aug live cattle: 182.37 down 4.05

Oct: 184.07 down 3.10

Aug feeders: 258.65 down 2.82

Sep: 258.10 down 4.12

Fed cattle sold for $188 in the South, down $2 from last week. Boxed beef was sharply lower. The average steer carcass weight for the week ended June 29 was 911 pounds, down two pounds from the prior week but 27 pounds more than a year ago.

Showlists grew this week, and packers had contract cattle to draw on. A rather sharp drop in choice beef on Tuesday spooked longs, which liquidated and had August futures down more than 350 points at the day’s low. The market was trading higher when the noon beef wire was released, so futures actually lost 390 points on the news, and in less than ten minutes.

 I’m inclined to think this is finally the beginning of the seasonal price break showing up, about two months late, although I don’t have much chart evidence to back that idea up. Every other time that I thought the high was in, the market came back and proved to me that it wasn’t. We’ll see if this time is any different.

Have a great weekend!

Jeff