So far the first full week in June has started off where the post 3-day Memorial Weekend left off, with Ag prices on the defensive. The rationale used appears to be on again, off again tariff negotiations or lack thereof along with weather that wasn’t as hot and dry over the weekend as forecasted, put the hurt on grains to begin the week. Technically the first indicator that the market was tired after the near 50 cent rally in soybeans off a “framework agreement” a couple weeks ago was on May 29th with massive daily reversals in corn and soybeans after the three day Memorial Weekend. Technical signals were flashing negative actually about a day earlier. Subsequent follow-through on Monday triggered at least short term direction negative.
With the June 29th updated planting intentions the major report upcoming until the July report updates yields, if weather stays anywhere near normal, any change in direction of markets will have to come at the end of the month. It was 2009 and then again 2012 when the corn market was complacent going into the end of June only to rally significantly ($3 in 2012). The lack of a tariff agreement or excellent crop outlook or the idea that we planted a lot more corn than NASS suggested on March 29th could do the trick. Any one of the three could create a surprise plus weather. So I continue to press for flexibility to change one’s mind when/if market conditions change, and we have had a lot of changes thus far with likely more to come.
I’ve discussed in this column before of the danger of traders merely extrapolating the past history of demand increases for soybeans into future years, having missed so badly previous increases. Some are of the belief China’s demand for example would be over 100 mmt this year and perhaps 108—110 for the met marketing year 2018/19. Last week, China’s National Grain & Oil Information Centre (CNGOIC) said in a weekly report announced that soybeans stocks have increased to a four-year high to 7.9 million mt, up 172,000 mt on the week and nearly 2 million mt higher than the year before, as poor crush margins and cheap hogs continue to swell supply, the Thursday. Arrivals of soybean in May are estimated to be 9.6 million mt, up from 6.8 million mt in April and 5.5 million mt in March, the CNGOIC also stated.
The revelation by the Chinese shows why they haven’t purchased much if any of our old crop soybeans and further supports my theory that ending stocks of soybeans in the USDA report next week will show a decrease in exports and a corresponding increase in ending stocks less a token increase in crush. A 25 mil-bu increase to beginning stocks on September 1 is comparable to harvesting a ½ mil-ac of soybeans without planting them.
Given the recent export sales report showing more of an emphasis on China buying new crop means I could be too conservative and ending stocks could swell over 500 mil-bu again, making any increase in soybean acres that much more burdensome for 2018/19.
Of course I don’t give particular advice in this column but hinting at some market aspects such as the exuberance to increase Chinese demand and for them to come back to the trough as some think they have their back against the wall, and my positive outlook since early January on corn prospects should have given readers something to contemplate and make their own decision. Charts below show what has happened in just the last week.
CORN: Up move generally come in three moves higher. The July corn chart below shows the completion of a 1,2,3 move higher . The failure of the next move higher above (3) happened two days before the massive daily key reversal down signaling that risk was to the downside. There is the danger/possibility of corn erasing the whole move back down to $3.63 when it all started in early January 2018. My aforementioned concern that a lot of traders who came to the bullish trough late and started to predict 1.6 bil-bu carryover did so near the top. It got crowded at the top ! From a weekly standpoint (no chart) the action there is concerning and leaves open the possibility of the trade discounting 176 –178 bu yield at a million acres more taking ending stocks back to where there is too much and negates the 1.6 bil-bu idea for carryover in 2018/19.
SOYBEANS: My focus, as you know, has been to be suspect of global/Chinese demand and the technical situation has reflected that and now with new supply info out of China and technical price action, there is nothing fundamentally or technically good ! Having lifted hedges at mid-June, we are 80% covered with no old crop in the bins, and raised our selling bar to a higher level. Those that are on a free trial were privy of the decisions.
As the trade dispute lingers, I am getting more concerned about 2019! China has placed an offer on the table to buy $75 billion in Ag and energy products if Trump will remove that tariffs he has promised. Odds are that won’t happen especially if intellectual property rights aren’t resolved to his satisfaction. I had hoped the “framework agreement” of a little over a week ago was progress but apparently not yet? So flexibility in thinking and understanding what no quick agreement means is important as we will be harvesting crops in three months and in earnest in four. So in the short run, the devil is in the details, and as you can see by the charts above, patience is running thin as our crops grow.
As is so often the case in volatile markets there are offers from newcomers to the advisory business and those who buy our products (ABCD’s of Ag) who may offer “an easier way to market”, and of the use of options only to mitigate concerns about market outlooks (S/D and Price). They seem to come out of the woodwork hoping to capture a share of the uncertainty. I’ve seen a lot of scheme and device in the last decades. Often deals are masked by high priced trading costs, or strategies that appear too good to be true. It has always been tough for me to rely on someone to manage the profitability of my business especially by someone who likely didn’t make a dime doing what he (she) is charged telling someone else in production agriculture to do. In years past, I used to ask, “So how much of this product are you recommending your mother to buy/sell or better yet, do you have skin in the game”. Usually the phone when silent! Perhaps that is a good question to ask today. There may be well intentioned folks out there looking to profit from Ag volatility again, after being absent or non-existent before. Be careful out there. When the dust settles, the buck will have stopped with you!
Jerry Gulke (info@GulkeGroup.com)
Read more from Jerry Gulke by visiting www.AgWeb.com/Gulke.