They did not get mad, just even

Published on: 10:04AM Jul 13, 2020

Back on June 30th, the USDA delivered bears in the grain and soy markets an unpleasant surprise via the acreage report that sent many of them scampering for the sidelines.  During the next week, Managed Money purchased almost 60,000 contracts of corn, 31,400 soybeans, 30,600 soy meal, over 18,600 soy oil, 5,300 Chicago wheat, and 4,000 KC wheat.  Granted, with the exception of soybeans and soy oil, this still left them with short positions, and a sizeable one at that in corn, but left the impression that it had created a psychological shift in these markets.  As it turns out, the bear had not experienced some type of epiphany, but rather a few of them just stepped to the sidelines to await the next excuse to pile back in. As the old saying goes, they did not get mad; they just wanted to get even and that they did last Friday and into this morning.

Realistically, there was nothing on the production and supply-demand reports released last Friday that, compared with trade estimates, would be construed as genuinely negative, but evidently, the sheer fact that all of the domestic numbers reflect very ample stocks of every commodity was enough to pull the rug out from beneath the trade, and we came tumbling down.  Of course, prospects for a little better weather coverage over the weekend and President Trump's comment that he was not planning on Phase II discussions with China helped grease the slide.

Before completely relegating the July report to the annals, I would point out the significant change in global corn stocks.  Ending stocks for 2019/20 came in 3 MMT below estimate, and for the 2020/21 crop year, they were nearly 10 million below expectations.  While the latter number is still a 3 million increase year over year, at 315 MMT, it is still the lowest stocks to usage ratio in over five years, and 62% of that total will be located in China.  While also largely overlooked, that sale of 1.365 MMT of corn to China last Friday was the 2nd largest single-day sale to that nation on record.

Southern China has experienced massive rains this summer, which evidently has exposed, and compounded an issue they were battling last year; African Swine Fever.  Infected animals were often buried, and it would appear the excessive moisture is spreading the disease via groundwater, and a number of new outbreaks have been reported.  Do keep in mind that the AFS has technically not been eradicated in that nation, nor has a vaccine been developed, but as you might suspect, this is a setback and concern as they try and rebuild their hog herd.

While a few more well timed and preferably large sales to China could be instrumental, for the time being, the weather is the dominant mover and shaker for the grain and soy markets.  I am a little surprised that the 6 to 10-day outlooks issued yesterday has not sparked a little more buying interest as it would appear temperatures are going to be quite toasty for much of the growing areas, but evidently the moisture predicted for the upper and eastern portions of the nation have taken precedence.

According to one industry expert, the outlook for the U.S. shale oil industry does not appear promising.  The CEO of Parsley Energy, one of the largest independent oil producers in Texas, believes that the peak 13 million barrel a day output we reached in the US earlier this year will not be witnessed again.  We are currently around 11 million.  A year ago, there were 853 horizontal rigs drilling for oil and that number has been reduced to 223, due to the price war between Opec and Russia and of course, the coronavirus economic contraction, pushing prices into unprofitable levels.  Since recovering from the panic lows set back in April, WTI crude has pushed back against the $40/41-barrel level and appears to have run into a brick wall.  Unfortunately for many shale producers, this remains below breakeven levels to pump oil let alone operate rigs to discover more.