Speculators Traded Plenty Of Bullish News

The commodity markets continually consume an extremely wide range of situations from around the globe which creates various degrees of risk and uncertainty for each day that traders in this environment attempt to profit. It is the desire of most speculators to find that window of bullishness that continues to build upon multiple situations that add to the idea that a given commodity, or commodities, must be rationed and the way this happens is through price increases. Since late summer we have seen just this type of situation develop as indicated by the corn price chart (left) and soybean price chart (right) below. Since just early October, the March corn contract has rallied over 85 cents per bushel to approximately $4.90 per bushel which represents a level not seen since 2014. As impressive as that looks, they January soybean contract has rallied an almost $3.75 per bushel to just under $13.50 per bushel over that same time. Let’s discuss some of the key factors that have been driving this bullish environment and encouraging speculators to take such heavy measures of ownership in corn and soybeans. Up until mid-summer, the USDA reporting system felt that the US could still make a robust corn and soybean crop with some still hanging on to the idea of record production. By early August it was understood that the US grain crops had seen too much adverse weather, including the now famous “Derecho Storm’ that took out about 7 million acres in Iowa. With the demand for animal feed, ethanol, and exports starting to pick back up, speculators began taking an interest in planning for the possibility of tight supplies which to many still seemed an absurd idea. About the time we began settling in to the idea of an excess corn supply of less than 2 billion bushels and an excess soybean supply of less than 500 million bushels reports began to surface out of South American that the early planted crops their were suffering from low rainfall. By Labor Day, speculators started to understand that the reduced US crop size coupled with the uptick in demand (especially China) could not endure a short South American corn and soybean crop without higher prices to a level that might even start rationing demand. On the demand side, exports became the main focus as US domestic uses of corn and soybeans for ethanol and animal feeding was still in a rebound from Covid19 impacts. By fall, the Chinese hog herd had increased by 40 percent over the first of the year, and the Chinese were buying upwards of 70 percent of all exported US soybeans. The export inspections charts below (corn on right, beans on left) show how since September 1st has exceeded last year, and even far exceeded the 5-year average. The most recent decline is due to the Christmas holiday season and will recover shortly. As price kept climbing, China and other users kept buying. So now the game was afoot to see how high prices would have to go to find rationing among users, particu larly the Chinese feeding indus try. With a surge in demand firmly established by October, we began to see a constant reference to weather maps like the one below that illus trates the rainfall deficit across major corn and soybean growing areas of South America. If South American, primarily Brazil and Argentina, were to become unable to

adequately supply China’s growing need for feed stocks, the speculators could find themselves in the driver’s seat. Despite being shown in milliliters, this weather map clearly shows how the major farming areas of both Brazil and Argentina are some of the worst drought targeted areas. And this is a situation that continues today, and will feed speculation for weeks or months to come until we know more about the ability of the US to grow a strong crop in 2021 to help supplies rebound.

Of course, many other factors have come into play. The multi-month port worker strike that was only recently resolved in Argentina. You can add the drought injured Russian winter wheat crop that has led to that country restricting exports. And closer to home, the value of the US Dollar. The dollar has continued to make fresh lows after breaking and closing under that 90 level recently. As much as the corn and soybean markets are about higher demand form China, one should not take lightly the change in amount of stimulus (thus cash) that has been pumped into the US economy and general marketplace by our FED, and the effect this has had throughout all markets. The cheaper dollar makes our commodities more affordable by foreign users and can be a very important factor when looking at export potential. The Corn vs US Dollar chart shows how this relationship plays out visually and illustrates a powerful image that is not lost of speculators. At some point, a cheaper dollar relative to the currencies of our export competitors helps US commodities find windows of opportunity that are explored literally around the clock by international brokers. Farmers are a part of the stimulus money as well. The Total Direct Payment table found on multiple USDA websites. This shows the magnitude of government support to agriculture and reflects the importance that our public places on a healthy agriculture and constant food supply. As with other ‘Covid19’ assistance program payments into the economy, this stimulus adds to a growing deficit that will hopefully be monetized by a stronger economy down the road. The other aspect of farm stimulus is that this action delays farmer commodity selling and for a time can lead to price increases in an attempt to create selling. As we know from so many past experiences, high prices, and high stimulus payments for that matter, do not last forever. We need to keep an eye on so many issues that might change once we start turning some corners. A working Covid19 vaccine will be a help to agriculture and should immediately help improve demand prospects. This will be felt most quickly in the energy sector including ethanal. The drop in the demand for gasoline has led to most ethanol plants struggling to remain profitable, and many or not at this time. The point here is that the longer a vaccine takes to ‘work’, the harder it will be to maintain high prices since crops will eventually recover. Weather can also change and improve cropping prospects, or not. And political action by countries worldwide as they try to maintain economic stability alongside Covid19 and then ultimately find growth. If you travel the Valley, you certainly understand weather. Unfortunately, the transition of the Pacific Ocean water temperature cycle switching to La Nina this past summer that is hurting rainfall chances across South America is apparently impacting the Valley as well. With prices improving to levels not seen in a half-dozen years, lets hope that regular rain returns to the valley in time for farmers here to take advantage. It is not that often that the stars line up with supply and demand conditions discussed above work in a way to keep prices at strongly profitable levels for very long.