Grain markets closed mostly higher on Tuesday, with cotton and livestock futures mostly lower.
Corn Score New Contract High Close
Corn futures were lower overnight and on the opening Tuesday on profit taking and farmer selling.
However, the funds were ready to buy on the break and pushed December corn 8 cents higher at $5.23 1/2 which was a new contract high close. September also closed up 9 cents at $5.00 1/2.
Darren Frye with Water Street Solutions says the corn market recovered as crop conditions dropped 3% on Monday to 57% good to excellent. Plus, the funds are still trying to price in a lower yield.
“Crop conditions were lowered again on Monday, and obviously 3%, that’s quite a hit. And then Pro Farmer had seen a lot lower yield when they
got done with their infield surveys,” he says.
Inflationary and End User Buying
However, Frye says the corn market also saw inflationary buying by the speculative traders.
“We’ve seen all these yields on bonds and notes around the world starting to creep out the top end. And so that’s an inflationary thing going on. Even though Bessent is trying to buy enough bonds to squelch that, I think a lot of these funds want to be long and they’re buying any breaks,” he explains.
However, he thinks end users or commercials are also buying the breaks. “They’ve sat back thought hey we got a big harvest coming like last year and maybe that harvest isn’t quite as big maybe we need to start front running this a little bit to get 30, 60 days of coverage on,” he adds.
Funds Still Have Room to Buy
The funds are long around 250,000 contracts of corn and 152,000 contracts of soybeans, so they are no where close to record length.
So Frye believes they could continue to buy. “They can expand even going to new records because we saw those limits expand, what, four years ago or so, and they’ve not really tested those upper limits. So they got a lot more room to buy. And I think we’re in just the beginning stages of a larger move anyway.”
Perfect Storm
He says if China comes in to buy corn from the U.S. and the yield drops to 175 to 177 bu. per acre or the soybean yield drops to 52 bu. and China buys the full 25 MMT, the market could get explosive.
“Then super El Nino. What does it mean for South America? Not always a good thing down there. La Nina is better for them. And so when we get into that type of growing season, we see any problems with production down there. I mean, you’re going to blow the roof off this thing because we got ending stocks in the world and domestically tightening up.”
He adds that is not something the market expected two months ago because there was no fear the crop was getting smaller.
Pro Farmer Yield Too Low?
The Pro Farmer yield of 173.2 bu. has been taking some criticism for being too low and that USDA will not go that low in the September report.
While Frye agrees USDA is not going to cut the corn yield by 7.5 bu. like Pro Farmer did, he does expect the crop to be downsized one to two bushels.
“But it’s not a matter of what they do in September. It’s really how small is the crop and where do we get to in January. And even if Pro Farmer is two to three bushels low on average from their survey to the January, that still means we get to 176.2. And that is a problem.”
That also means the soybean crop could lose a bushel or more on yield.
“Typically, when these crops start going south, they continue in that direction. That’s what we’ve seen here over the last month with crop
conditions.”
Corn Stocks to Use Under 10%
It would only take a bushel cut in corn yield to put the stocks to use ratio on corn below 10% which is the threshold for corn historically rallying over $5.
Frye says that means December corn needs to take out the contract high of $5.24 1/4.
“You’ve got a situation here with this type of carry out and with all the uncertainty over South America when they start their planting season, if they delay that at all because they don’t have adequate moisture, you’re talking, you know, $6.00, even $6.50 corn.”
The Key to $6 Corn
However, he thinks the real key is what China buys. If they purchase 5 MMT to 10 MMT of corn the market will need to move much higher.
He is also watching war developments.
“Does this Russian Ukraine thing continue to go on? We thought it’d be a couple of months. It’s going on five years. And we thought the war with Iran in the Middle East would be two weeks, three weeks. That’s what we were promised. We’re starting month six when we turn the calendar forward to September,” he states.
So if crude oil starts going up, Frye thinks the corn market needs to add 50 cents to $1 on corn and bean oil.
Repeat of 2020?
September corn closed above the $5 mark on Tuesday. Seasonally, it is unheard of for corn to make new highs during August without a massive shock like drought.
The combination of factors is playing out similar to 2020 and the last bull market.
“I think it’s similar to 2020 for different reasons, but it feels a lot like that. You know, the farmers somewhat conditioned because of all the bearishness we’ve had, and they’ve been very discouraged over that. I understand that. But let’s not let that happen again.”
He’s afraid farmers will be sold out by $5.25 or $5.50 on corn and $12.50 on soybeans out of the field.
“And then what happens if the funds are long and we really have a problem in South America, the war continues and the natural seller in the market is sold out? That’s when you go to extreme levels where nobody thought it was possible,” he adds.
Soybeans To Take Out July Highs?
Soybeans were up 13 1/2 cents on the November contract on Tuesday at $12.37 3/4 but have not tested the contract high from July which in the November contract is at $12.56 1/2. However, even with a record 53.3 bu. per acre yield, Frye thinks its possible to take out that level due to the strong demand.
“I think what we’re crushing and I think the exports are probably a little low in the balance sheet for USDA on their projections. And so I do think we’ll easily get back into that $12.50 to $13 area and take out those highs. Obviously, if we delay planting in South America because of El Nino, and right now they’re very dry, they need to get moisture. If that monsoon doesn’t start on time, then I think we can keep pushing beans and corn both to the upside,” he adds.
China Soybean Buys?
There was more market talk on Tuesday that China was looking for bids off the Gulf and PNW. Plus, another flash sale of 4.85 million bu. of new crop soybeans was reported to unknown destinations, which could be China.
So far China has bought about 10.5 MMT to 11.0 MMT of U.S. soybeans but Frye thinks they may get to 12 MMT by the end of August and ramping up into the Sept. 24 meeting with Xi and Trump in Washington.
“We have one more export report here to see what happens here on Thursday. But they’re doing a lot of business. They normally don’t start as early as they did. I think that has something to do with September 24th. But I think they could get to 15, 16 million by the time we get to the meeting. And that’s pretty good when you consider. We could have an extended marketing period for them, especially if there are delays in South America. So I think they’ll get the beans,” he adds.
Frye is not concerned about trade relations being strained with China as the U.S. imposes economic sanction on entities that are working with Iran. Nor does he think the additional 7.5% tariff that is being proposed will have a negative bearing on the China meeting.
“I think that’s all part of the jabbing each other back and forth ahead of the summit, ahead of the 24th. There’s always those things going on.
President Trump always seems to want to stick his finger in President Xi’s eye to some extent. And these are things that do that and maybe soften it up for better negotiations. But I think President Xi and China will buy the soybeans and buy those agricultural goods at $17 billion a
year,” he concludes.
Wheat Follows Row Crops, Watches Black Sea
Wheat has been getting some spillover from the rally in corn and soybeans but it still driven by war headlines in the Black Sea
Exports from Russia and Ukraine have been impaired but the key is how long does that last versus when will they two countries make a deal?
Frye doubts the two countries will come to a resolution. “I’d give it a less than a 5% probability. President Zelensky and Putin, they don’t want to make a deal. The fighting keeps escalating. I do think that’s why the wheat market is on pins and needles, because we keep hearing about.a grain passage a truce to that and and let’s get grain exported out of the Black Sea. If that would happen that would be pretty bearish for a period of time i just don’t think it’s going to happen,” he adds.
Cotton To Make New Highs?
The cotton market was lower on Tuesday with December down 49 points at $88.34.
Frye says the market saw some profit taking with lower crude oil futures but he thinks the futures will test or exceed the recent contract highs.
“We’ve had too much dry weather in a lot of the West Texas area,” says Frye,” They needed to get a rain a couple of weeks ago to salvage that crop. They’ve lost most of that crop. And now I think if crude oil goes higher, that’s only going to assist cotton prices even to a higher degree. So I’m bullish cotton. It’s acted really good. And I think we can go out the top and maybe move to that $1.00 per pound mark.”
Cattle Implode
Cattle futures were down sharply for a second day making new lows for the move and closing below the long term uptrend lines for a second day.
The Trump administration’s plan to lower beef prices by 25% by allowing 300,000 MT of ground beef to be imported into the U.S. has hurt the market as well as USDA announcing the second port will reopen to Mexican feeder cattle in another 30 days.
“But I think there’s a market that’s awful tired. You know, we have pushed it and pushed it for five and a half years. We’ve gone to levels that people didn’t think possible a year and a half ago. And I think it’s just tired. It needs a reset. It needs a rest. And I think the bad news that’s come from the extra hamburger and no import tariffs on that and the border opening up and all the things President Trump’s trying to do get
lower prices for the consumer is part of it too,” he states.
How Low Will Cattle Fall?
This is a seasonal time for the beef market to break as well.
But Frye sees more downside pressure, “I still think we got $5 to $10 down in cattle and maybe that much or more in feeders before we see a nice recovery.”
After taking out long term up trend lines will the market establish a new trading range?
He thinks its possible but believes that until the war ends or the tightness in the herd is fixed it is hard to be bearish.
“I think we can rally again. So I’m not bearish long, long term, but I think short term, I think you got to be defensive.”
Lower Cash?
Some light trade was reported in Nebraska already on Tuesday at $345 dressed which would be sharply lower than last week but on light volume.
Frye says he thinks cash will be lower this week especially since the Labor Day push is coming to an end.
