USDA says “don’t worry” (and speculators listen)
After 6 weeks of basically going vertical, grain markets tumbled in the second week of May as the USDA’s first estimates for 2021/22 global supply and demand came in relatively bearish. Suggesting some pretty big crops that will meet the current heightened demand. Front-month corn, wheat, and canola were the big losers, but this shouldn’t really be attributed to fundamentals, but rather the increased number of speculators playing in the market who “got out” last week. Worth mentioning is that we don’t get the USDA’s estimate of the U.S. domestic balance sheet of wheat, by class, until the July WASDE report.
Why did this sell-off happen? Quite simply, expanded margin limits have allowed money managers to make even larger bets on agricultural commodities, meaning that they now have to put up less collateral to trade the same amount of volume. Furthermore, earlier this month, the CME Group increased its limit moves in corn by 60%. All this basically means is that the fund managers can make bigger bets, which usually means bigger volatility (and if you don’t know what bigger volatility looks like, revert your eyes to the chart above of last week’s performance!).
In reality, in the last month, open interest in agricultural commodity futures grew to a record $315 Billion, which basically means that grain futures were pumped up by said speculators on weather and demand headlines and as a hedge against inflation. With the meteoric rise since the start of April, last week was when a lot of them started to push the sell button. However, with these non-traditional investors in the grains market in a big way, we could certainly see another rally this summer that echoes the pattern of what we saw this spring.
Getting into the fundamentals though, it’s still a bullish market – especially for canola, soybeans, and corn – or at least until more about the current crop is known because it’s against a backdrop of a tight carryover of old crop inventories. Basically, a lot is riding on getting some good weather this year and while the world wheat balance sheet isn’t as bullish as some other crops, any weather issues in the Black Sea, EU, or even fairly-dry Argentina could catalyze a spicy market. On the flipside, good moisture in the U.S. Southern Plains could help alleviate some of the current supply concerns in the global market. As last week’s WASDE showed us though, even with a record year of wheat production in 2021/22, global ending stocks are set to decline year-over-year on record demand.
Looking at the major players, production and exports are set to drop in Canada and Australia, while U.S. exports are expected to fall as compensation for increased domestic feed use. Aggregately though, U.S. wheat ending stocks are still expected to fall year-over-year. There’s also quite a lot of debate in the market about how the Russian wheat crop is performing as, while the USDA’s official estimate is at 85 MMT, their attaché in Moscow says that number is likely closer to 77.5 MMT! Private analysts are estimating the crop within that range but it does seem odd that the same government agency is so far apart in their forecasts.
By and far, farmers in North America have been getting the crop in at a rigorous pace that’s well above the five-year average. It’s estimated that, through this past weekend, Western Canada’s Plant 2021 campaign is about 2/3s complete, which is well ahead of the seasonal average pace of about 40% complete. Given the lack of beer clouds, this year’s seeding effort has been largely uninterrupted by Mother Nature, which helps explain the speed. However, the dryness is concerning, and add some sub-zero temperatures possibly later this week in the Prairies, the bullish undertones remain!
Ultimately, the smart traders and money managers I follow are expecting the old crop supply situation to get more bullish, which means that new crop prices should start to reflect the urgency of buyers needing to source supply (even if it’s for a movement period in 2022). Given the current and expected continue volatility, using all the tools in your grain marketing toolchest will be critical – hedging, target pricing (including Combyne’s multi-buyer tool), and deferred delivery should all be considered.