Spring’s early warmth is quickly turning into summer’s
furnace. The same weather that allowed farmers to get their planting done at a
record pace is now threatening the welfare of those same crops. The dry weather
is also fueling a rebound on the heels of May’s declines. The declines of 14.5%
in July corn and 12% in July soybeans helped trim the record speculative
positions as stated in the Commitment of Traders Report in both of the markets by 25%. The markets have reset and are now
being driven by the weather and crop reports.
Grain traders, farmers and end line users have access to
more data than perhaps, any other market. Ag Trader Talk reported that soil
moisture for the Midwest grain belt is the second driest since 1895. Precipitation
models are available for every major production region in the world. You can access
Chinese, Australian, Russian and South American weather reports as quickly as
you can Google. The dry soils will have a material impact on the double crop beans
in the Eastern Corn Belt, which will have tough time getting planted at all.
This solidifies the bean strength over corn weakness thesis we’ve been
operating under since the first planting reports.
The USDA publishes many regular reports. The weekly Crop Progress Report tracks the main producing states’ crop condition rated as poor,
fair, good or excellent. The recent drop in soybean crop condition, to the
lowest levels for this time of year since 1993 fueled a single day rally of
3.5%. There is also some correlation between the mid-June Crop Progress Report
decline in soybean conditions and the final yield for the soybean market. The
soybean market needs to hit trend line yields near 44 bushels per acre.
Anything below this would seriously compromise the stocks to usage ratio, which
continues to flirt with record lows due to strong overseas demand. In fact,
global demand has outpaced supply in three of the last five years.
China’s impact on the grain markets cannot be
underestimated. The growth of their livestock industry to meet the growing
appetites of their economically empowered middle class can be seen in the
dramatic increase in their grain usage. For example, China used more corn for
animal feed in 2011 than they used as an entire country in 2004 and their
soybean usage has more than doubled during the same time period.
Fortunately, the USDA tends to underestimate the corn crop
in the June Crop Report. Recently, the margin of error has pushed towards 300
million extra bushels by harvest. Commodity bulls may be jumping the gun on the
early summer’s effect on end yield, as well. The Commodity Weather Group’s
studies show that the Mid-June Crop Progress Report is an unreliable yield
predictor for the corn market. This is just as important because the corn
market also started the year with little in reserve as last year’s usage far
outpaced corn’s below trend yield. This is part of what led to the record corn acreage
being planted this year.
Modern farming practices continue to push the efficiency
envelope. I think this is one of the main reasons why there is little
predictive value in comparing current conditions to those more than 100 years
ago or, even 20 years ago. News reports may sensationalize the use of
genetically modified seeds and the impact of fertilizer on the ground water
supply but the fact is, without the continued advancement of the agricultural
sciences the world would rapidly experience an exponential explosion in food
costs.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.
