July 2021 Market Letter
Commentary provided by Chad Burlet of Third Street AG Investments
Released: August 1st, 2021
We came into July on the heels of a huge price rally caused by the USDA’s June 30th acreage report. Their estimates for corn and soybean plantings were both more than a million acres below the average of the analysts’ estimates. Those rallies quickly faded, however, as both December Corn and November Soybeans recorded their monthly highs on July 1st.
While corn and soybean futures both closed lower for the month, it would be misleading to say that the weather was good; “mixed” would be a more accurate term. At the risk of over-simplifying the weather pattern in our key growing areas, conditions were generally poor for much of Minnesota, the Dakotas and portions of Iowa. Conversely, the remainder of the central U.S. and most of the south, southeast and east had generally good to excellent weather. As a result, corn futures were down more than 7% for the month. Because August is the key month for soybean growth and yields that market continues to carry more of a risk premium and November futures only lost 3.6% this month.
We also think the old crop cash markets and calendar spreads contributed to the greater break in corn prices versus soybean prices. With improving prospects for new crop corn, farmers have been willing to part with more of their old crop stocks and the cash market has been below the futures market for most of the month. As a result, the September-December calendar spread lost almost a dime this month with September trading at a discount to December on the 29th, an 8-month low. Soybeans, at the same time, have remained relatively tight and August futures gained significantly on November. The biggest driver here was the recognition that the U.S. had become price competitive for September business into China. That caused the spread to rally from 25 cents over to 72 over in the first half of the month. As China remained quiet the spread faded back to 46 over before ending the month at 65 over. If the Chinese government sells their soybean stocks to the crushers as part of a reserve rollover program, the spread has seen its highs. If the crushers buy 1-2 million metric tons (MMT) from the U.S. for September that spread could trade at a dollar inverse before expiration.
One of the most interesting features in the world corn market has been the reversal of roles between China and Brazil. In a normal year we would be observing record exports from Brazil and they would have some of the cheapest domestic prices in the world. What we are seeing is reduced exports out of Brazil and record imports from neighboring Argentina. Brazil’s domestic prices are at record highs. Meanwhile, Chinese corn prices continue to fall, hitting a 10-month low a little over a week ago. Estimates of the Brazilian crop continue to fall due to the drought and multiple freezes. A leading Chinese consulting firm increased their crop estimate 3% last week. Estimates of
Brazilian exports have fallen from 28 to 20 MMT and estimates of Chinese imports have fallen as low as 20 MMT for next year from a high of 34 MMT.
While corn and soybean futures were both lower this month, all three wheat markets closed higher, led by a 6.5% rally in Minneapolis. The drought in Minnesota, the Dakotas and the Canadian prairies was particularly hard on the North American spring wheat crop. The Wheat Quality Council did their annual crop tour last week and estimated the average yield at 29 bushels per acre. While that is in line with the USDA’s July estimate, there is a sense that both the U.S. and Canadian governments have over-estimated the Canadian crop by at least 4 MMT.
Internationally, the picture is mixed with Australia and Europe doing well while Russia and Kazakhstan are being hurt. International prices have move higher but the U.S. remains a high priced island. Despite that our export sales pace is on target to meet the USDA’s estimate.
Back in the U.S., Kansas City wheat futures gained more than 65 cents on corn. Cash Hard Red Wheat (HRW) had fallen to 80% the price of corn in the southern U.S. and it was being aggressively used as a substitute for corn in feed rations. The market seems to have recognized that higher protein HRW may be needed as a substitute for spring wheat and that lower protein HRW might be needed to replace Russian wheat if that crop finishes poorly. With that 65 cent move we are close to pricing HRW out of feed rations.
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