Interesting Summer Markets, is a Rally Possible?

Aug 01, 2020

Zack Gardner, Grain Marketing & Origination Specialist

The grain markets have had an interesting finish this July and could potentially have an even more interesting start to August. For the past month, the markets have revolved around two things- weather and China.
Weather has been just good enough. Most of us have been either missing key rains or only getting a few 10ths, but when added to the cool overnight temperatures and some heavy dew’s, we’ve been getting by…for now. The weather forecast is still keeping us on the edge of our seats; we might just see some sort of a weather rally before harvest. The window is closing but we are still in need of a good rain.
Over the past three weeks, we’ve made three record large corn sales to China - with each sale larger than the last and yet the markets have been less than excited (moving only a quarter of a cent with the most recent 75 million bushel corn sale). We’re currently seeing record high demands inside of China; as seen in the weekly corn reserve auctions which have been selling 100% of corn offered for the past 11 weeks straight. Not only has the China reserve corn been getting gobbled up by their domestic market, but the price of that corn keeps going higher. We’ve seen a price range to the equivalent of $6.26 per bushel to $7.39 per bushel for domestic corn inside of China. A recently developing story of record flooding in China could also lead to more demand if any of their crop land is destroyed.
For soybeans, the story is more known- China needs beans and we’re currently the world’s cheapest source. The amount they need to buy, however, is the question everyone is struggling to answer. They’re currently on pace with our USDA’s export estimates for the year but way behind in fulfilling their phase 1 Ag purchase obligations. Due to the price difference between the US and South America, we should expect any future purchases the remainder of the summer, to be from us. With how much they bought from Brazil earlier in the year however, the market is beginning to wonder “just how much do they need to buy from us?”
Looking ahead (and why the first part of August might get exciting) is the August crop report. Acres and ethanol were adjusted last month with little known change, so the spotlight for this report will be directed to yield and exports. At the end of the day, it comes down to supply and demand fundamentals. Right now the market is trying to decipher whether the weather will increase yield (supply) more than China (demand) can buy/import the grain that we produce. When looking at the numbers from those scenarios, increasing yield alone would give us a stocks-to-use ratio (amount of surplus bushels) of 19.5 percent. This increases our export number to account for China purchases while not raising our yield would grant us a stocks-to-use ratio of 16.5 percent. The problem ultimately lies in our over-abundance of corn. Traditionally, a “comfortable” stocks-to-use ratio, or amount of surplus grain, is ~13 percent. In the past six years, we haven’t been above 16 percent. Supposedly, the reason the market is in limbo is because China is buying US grain to refill reserves, in case another wave of the Coronavirus shuts down their ports again. They’re also way behind on their Phase 1 trade deal purchase commitments, so they could/should end up buying a tremendous amount of US grain, but the market just doesn’t know how much to count on!

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