June 8, 2016
The last month was very supportive for grains as hedge funds added heavily to their net long corn and soybean positions. Since our last monthly update on May 10th, December corn has added 49.25 cents, November soybeans are up 82.75 cents, and July Chicago wheat is up 58.25 cents.
As we said in the last monthly report, the funds are “bullish until proven wrong,” and basically nothing new has come to light to change this fact. The US Dollar Index has been turbulent, but is back to basically the same level it was on May 10th. Planting pace resumed and finished at an above average pace in most areas. Crop conditions are at 75% good-to-excellent for corn and 72% for soybeans: both historically high. South American harvest has progressed as expected. While yields have been reported lower in areas of South America, overall crop size estimates aren’t dramatically below month ago levels. What we said before holds true for the moment, the funds are in control. This is great for growers because it allows for better marketing opportunities and we want to continue to take advantage of them as they emerge.
Hedge Fund Activity
Hedge fund activity is probably the largest factor affecting prices in today’s market. It would be hard to quantify where prices would lay without them. For this rally to continue without any weather issues in the US it will almost certainly have to center around hedge fund involvement. The following chart shows the managed money positions vs the price of corn for the last 15 months. It was a fairly weak time for commodities due to the strong dollar. For that reason, the funds were net short for 53% of this time and during this time the price averaged 20 cents less than it did while they were long.
Clearly the market is sensitive to hedge fund positioning as this chart shows. Anyone who has followed the funds could tell you this without having to point it out on a chart. However, the reason we added this was to remind everyone that the funds aren’t always right and last year was a costly lesson for them. The managed money crowd had a fresh record short corn position in early June. This was completely wiped out with a massive short covering rally which peaked on July 13th, 2015. By that date the funds were net long over 200,000 contracts of corn, a position change of 1.687 billion bushels in just under 45 days! We all know what happened after that, corn slumped back to new contract lows as fundamentals took over, as they always do. We are not trying to “predict” the same outcome again because we don’t know what weather will be like this summer. However, we are alluding to the possibility that this rally is not fundamentally driven. The newswires and fundamental “reasons” usually follow price action and are usually already factored into the market. In our opinion the major driver of the rally to this point was money managers putting on massive long positions as they attempt to bottom-pick commodity prices and bet on a weather problem this summer. Whether our assumptions are correct or not we do not care. We continue to base our marketing and strategy advise on profitability and not our opinion. We are at or above the 2-year high range in both corn and soybeans and at a profitable level for most producers. Locking in a floor at these levels and having ample upside price exposure as we head into the June 30th reports and July weather is paramount in our opinion. For low margin call risk and high upside price exposure, a combination of making cash sales and buying May 2017 call spreads has been a good strategy for many producers. Make sure to check with your Advisor and AgYield to make sure that you have a strategy in place that you are comfortable with and provides the right level of downside price protection, capital requirements and upside revenue potential that you are looking for.
Old Crop/New Crop Spreads
Another indication that the funds are heavily involved (aside from the CFTC telling us their net positions), is the amazing spread action. The US carryout levels are not tight by any measure. In fact, they are at multi-year highs. The following chart shows the ending stocks (projected by the USDA) divided by total use.
2015 is a great year for carryout. This is the highest soybean carryout since 2005 and the second highest corn carryout in the last decade. So why exactly are we seeing the spreads act like this:
uly – December corn: July corn is trading at only a 2 cent discount to December, implying very tight supply or extreme demand. However carryout is projected at multi-year highs.
July soybeans got to a 75 cent premium over November, even though they will be the most abundant since 2005
This is just a snapshot of the entire forward curve of these products. In soybeans, it is a complete backwardation market, meaning the closer to delivery, the larger the premium. This could be the market pricing in a larger than expected South American production cut… OR it could just be that the investment crowd flows money into the most liquid contracts (which means front month). Again, it is impossible to quantify the fund money impact but these spread anomalies coincide perfectly with the fund positions.
Caught short
Part of the reason for the rally was that many in the industry were caught “short” including the large multi-nationals and large spec traders. In hindsight the market that was caught the most short was the soybean complex (and specifically soybean meal) in nearly every sense. The market was short flat price, short spreads, short soybean meal against oil and short on soybean crush. The harvest delays in Argentina combined with the managed money investment into commodities was the catalyst that started a massive short-covering rally that lasted for over 2 months. This rally in the soybean complex spilled over into the corn and to some extent wheat markets, convincing funds to cover shorts and increase long. Many producers, advisors and managed bushel programs were aggressive sellers of soybeans at $9 (and in many cases speculative sellers on top of hedges) only to see prices quickly rise above $10 and now $11/bushel. Because of this, we believe that the same players are trying to make up for their low priced soybean sales by waiting for much higher corn prices. A very risky strategy in our opinion that could result in 2 very bad marketing decisions.
So what now? In our opinion the short “squeeze” is over but the massive fund length and strong looking chart technicals remain as we look at new crop soybeans and corn. Now we are in June and just entering the heart of the growing season. At these prices there is equal risk of a major break or major rally in our opinion. This is why June is a common month for putting in yearly highs as the risk premium is built into the market but a weather problem fails to materialize. We will need new bullish information to continue to support and drive prices higher from here. However, if the weather does turns south, we could see another massive rally even from these levels. You can see in the weekly corn chart below that we are approaching some very interesting levels in the corn market around $4.40/bushel. Trading above this level would be at fresh 2-year highs and look pretty good on a chart for the managed money crowd and combined with a weather problem could easily push prices north of $5.00/bushel. However, without a weather problem we could just as easily see the market top around this level and see prices test the low end of the range of $3.50. Because of so much uncertainty, the volatility should stay very high through August and at many times will be “untradeable”. This is why we are very adamant about aggressive hedges with a lot of upside exposure to carry us through the next 2-3 months. Moving hedges into the cash market when basis levels are decent to free up capital would be a good move in our opinion. Swings in the market are likely to be very large at times and rather emotional. Having a sound strategy in place right now with a gameplan will be important as trying to “react” could prove very challenging.
Upcoming reports
There are two report days to watch in the month of June. The June WASDE report will be out on Friday, June 10th. The Stocks and Acreage reports will be out on Thursday, June 30th. The WASDE report will be important because the market will want to know what the USDA sees for South America. However the major market mover will be the June 30th report when we get a much better handle on old crop stocks and new crop acres in the US.
In our last report, we talked about the potential to see record acres shift to soybeans from the March report. The corn-bean ratio reached an all time high for this time of year. Some producers were even facing negative margins for corn while having positive margins for soybeans, which was a very clear incentive for those who were able to make the switch. Now that planting is wrapping up without issue, it looks like weather isn’t going to play a major role in the acreage decision this year. With corn and soybean prices both near 2-year highs, we expect combined acres to increase from the March Intentions report. The majority of those acres will go to soybeans in our opinion and some acres will have switched from corn and other crops into soybeans as well. We are going to use an increase of 2.5 million acres for soybeans and a decrease of 1 million acres for corn from the March report. This was one of the largest incentives in history to switch acres from corn, wheat and cotton into soybeans. We have seen switches of 3-4 million acres in the past so we should be open-minded to the potential of a large acreage surprise on this report.
Please give us a call if you have questions about our marketing plan.. Now is an especially important time to make sure a solid plan exists and to ensure nothing is overlooked.