June 2021 Market Letter
Commentary provided by Chad Burlet of Third Street AG Investments
Released: Wednesday, June 30, 2021
In our May Market Letter we wrote about the exceptional volatility in the agricultural futures markets. June showed us that May was just a warmup. In May corn had seen a 3.5% break and a 3.9% rally in a very short time frame, in mid-June it doubled those moves in a day and a half. However, it was soybean oil futures that were the true volatility champions. When the Supreme Court ruled in favor of petroleum refiners, soybean oil lost 6% of its value in five minutes. When the USDA released its stocks and acreage reports earlier today, soybean oil rallied 7.4% in less than a minute. July soybean oil’s 18 cent monthly trading range represents 24% of the underlying contract’s value.
The government’s June 30th reports are usually amongst the most important of the year because they give us both third quarter stocks and a definitive word on planted acres. Today’s reports didn’t disappoint as stocks came in slightly below expectations and acreage was far below the average of analysts’ estimates. Corn acres were expected to be up 2.6 million from March intentions and they were only up 1.5 million. Soybean acres were expected to be up almost 1.4 million from March, but they came in 45,000 lower. The reaction in the futures market was even stronger than expected as traders, who had liquidated positions prior to the report, scrambled to reestablish their longs. Corn futures locked their limit of 40 cents higher and soybeans traded nearly a dollar higher before settling up 90 cents.
As dramatic as those reports were, they will quickly take a back seat to weather and to yield expectations. A 2.5 bushel per acre (bpa) change in the corn yield is more important than the 1.1 million “missing” acres. To that end, we think today’s 45 cent rally in corn may be premature. Portions of the eastern belt will have record yields and they will be supported by excellent crops in the south, southeast and east. Western MN and the Dakotas are certainly important, but they are not an offset to the areas that are doing very well. The Midwest corn crop is made in July and the weather forecast can certainly change, but at this point we would expect the U.S. to exceed the 15 billion bushel production estimate from the June WASDE. Internationally, the Brazilian crop estimate will come down, but the Ukraine and China estimates will increase.
The soybean story is somewhat different because the balance sheet is tighter and because the U.S. crop isn’t made until August. The soybean market clearly needs to carry a larger risk premium than corn. That being said, there are two important signs that higher prices are having their desired effect: Chinese demand is coming down and South American acres are coming up.
Chinese crush margins have been poor for quite awhile and their weekly crush rate has slowed down. To meet current USDA estimates they’ll need to crush 1.5 million metric tons (MMT) more than last year during July-September, but their recent pace is 10% below last year. In Brazil producer groups are already talking about a 4% increase in acres. With trendline yields their crop will be 20% bigger than this year’s U.S. crop.
Soybean spreads have been signaling that the market may have solved this year’s carryout in the U.S. The July-November futures spread lost $1.27 this month and it traded into the low-40’s this week, $1.87 off its early-January highs and its lowest level since early-September. We are watching the U.S. and Brazil export markets with interest. If the U.S. becomes competitive for late-August or September, old crop spreads might have one more day in the sun.
With a generally comfortable U.S. and world carryout wheat has been less volatile than the two big row crops. Wheat’s monthly range reflected 11% of its value versus 18% for its bigger cousins. However, wheat has the potential to write an interesting story if spring and white wheat crops continue to bake and if the feedlots can feed as much hard wheat as they’d like. Currently wheat is shaping up to only be a protein story with a shortage of high protein spring wheat, but if the combination of dry weather and feed use drop the current 770 million bushel carryout to 650, the markets could get interesting. At the present wheat is too cheap relative to old crop corn and too expensive relative to world wheat. If feeders are able to keep wheat in their rations until October we like owning KC Wheat versus corn.
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