Third Street AG July Commentary
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U.S. farmers planted the final eight million acres of corn and soybeans in July. While that is a record and clearly the lead story for the agricultural markets, it was also the lead story in May and June. As most of the U.S. experienced better than expected weather in July, the markets appeared to grow weary of the “Record Slow Planting” story as the month went on.
The futures markets for corn, wheat and soybeans all followed the same path: putting in their highs mid-month and then closing the month on their lows. All three markets were helped higher by the bullish wheat surprise in the July 11th WASDE report. The USDA cut their production estimate for our five major exporting competitors by a combined 10 million metric tons (MMT). Chicago wheat futures quickly rallied 25 cents and the other markets followed.
The other engine that was pulling the markets higher was July corn futures. That contract was converging with a cash corn market in the eastern U.S. that had nervous end users paying record basis levels. Processors and feed mills were behind in their buying and they panicked when they saw millions of unplanted corn acres in their draw areas. July futures were the tether that connected the futures market to that extremely strong cash market. That contract expired on Friday afternoon, the 12th. The September contract made its high that Sunday night on the open.
The corn market had soared the highest, up almost 8% for the month, and it fell the furthest, losing more than 13% from its mid-month high. The soybean and wheat markets lost 6% and 8%, respectively from their July 14th-15th highs. All the markets made their lows on the final day of the month.
While the supply side of the equation was grabbing all of the headlines, the demand side was also suffering. All three commodities were hurt by the months-long floods and closures in the river system and at the Mississippi River Gulf. This is the leading location for U.S. agricultural exports and its capacity was cut by 30-70% at various times from April through July. This severely impacted U.S. competitiveness.
In the corn market demand from ethanol producers is starting to decline. Margins are under pressure and EPA Director Wheeler has made it clear that he plans to continue to issue small refiner waivers. Record productivity, more ethanol from each bushel of corn, has also reduced corn demand. Despite a weekly grind that was a three month low, ethanol stocks hit an all-time high this week.
The biggest factor in limiting world soybean demand has been the continued spread of African Swine Fever (ASF). China has been the hardest hit, but the rest of Asia and a few locations in Eastern Europe are also seeing the disease spread. While the Chinese government says the disease is “winding down,” private estimates are that the losses could reach 50% of their herd by next year. It already appears that China will fall 2-3 MMT short of the USDA’s 85 MMT estimate for their soybean imports this crop year.
On the broader trade front, the U.S.-China trade talks are not going well. The two sides met briefly yesterday and they will not meet again until September. It appears extremely unlikely that there will be an agreement during this U.S. Presidential term. We Know Agriculture ™
Looking ahead, the August 12th WASDE report looms large. NASS has resurveyed 14 key states and Prevent Plant claims are flooding into government offices. To add to the uncertainty NASS has said that all cover crops and silage will be counted as planted acres. Thus “harvested acres” have replaced “planted acres” as the numbers of greatest importance. Yields will also be closely watched and hotly debated. Prospects are certainly lower because of the shorter growing season, but will they reflect that before they know how long the growing season will actually go? Our view is that final yields for both corn and soybeans will end up 5-10% below trend. Unfortunately, demand is trending in the same direction.
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