Jerry Gulke: Will the USDA Reports Be an Inflection Point for the Grain Markets?

After a volatile week, the grain markets ended the week on a high note. December corn prices were up 19¢ and November soybean prices were down 7¢ for the week ending Sept. 9. Wheat prices were up 40¢ to 60¢.

“We'll see if prices move higher next week into Monday’s USDA reports,” says Jerry Gulke, president of Gulke Group. “I would expect the report to have better yield potential than what Pro Farmer had from its Crop Tour.”

Following the 30th annual Pro Farmer Crop Tour, Pro Farmer estimates the 2022 U.S. corn crop at 13.759 billion bushels based on an average yield of 168.1 bushels per acre. 

For soybeans, Pro Farmer estimates the 2022 U.S. soybean crop at 4.535 billion bushels with a national average yield of 51.7 bushels per acre, down from the 51.9 bushels per acre USDA estimated Aug.12.

The crop is further along than when the Tour happened, Gulke says. 

“Plus, we’ve had no bad weather really in the good areas,” he says. “The bad areas probably got worse, but the good crops likely got better.”

As such, Gulke expects USDA to drop the national average corn yield to 172.5 per acre. USDA’s August estimate was 175.4 bu. per acre. He says USDA may leave the national average soybean yield at 51.9 bu. per acre. 

The key, he says, will be what USDA does with its demand estimates, in light of continuing inflation and global uncertainty.

“The global demand situation is what really counts,” he says. “China has already said it will reduce imports by maybe 5 million metric tons (MMT) or six MMT. A lot of people think it's more like 10 MMT. So that global demand is going to be the more important situation.”

Argentina Government Drives Soybean Sales

In other global news, the Argentine government has given farmers an incentive to sell their soybeans. 

“The devaluation in Argentina has been significant enough that farmers were just holding soybeans,” Gulke says. “So, the Argentine government gave them incentive to sell some soybeans to what we understand to be about a $6 per bushel kick in the price.”

This will take away the incentive to hold, Gulke says, but time will tell. 

Technically Speaking by Jerry Gulke 

I’ve been an advocate of technical analysis since charting price movements became easier with the advent of the Apple IIe and computerized charting programs. Prior to that I used to chart prices by hand using a long piece of graph paper and a pencil first for equities (the stock market). 

I recall the time when I sold 100% of my equities and bought machinery, land and rented land and made the decision to quit my day job simultaneous to receiving my MBA realizing I was worth more to myself than the engineering company for whom I had worked for 10 years. Returning to farming was never a regret.

There wasn’t a lot of competition when I began analyzing supply and demand and associated price outlook using technicals as a guide. I soon realized that those that traded our production had almost as much influence as weather. A shock was when I realized that major companies that use our commodities in processing, exporting and speculating hardly ever were producers or associated directly with production agriculture. 

A manager of a major ag firm once told me, “Why should I produce it myself when I can buy it from a farmer at below what my cost of production is?” It was kind of a slap in the face but a wake-up call, nonetheless. I quickly realized I needed to pay attention and become astute in managing price risk.

Today when I consider the media hype it seems like the same old story whether in a bull or bear market including how we find ourselves today. As prices went up and peaked mid-May for Chicago December wheat and December corn and early June for November soybeans the rhetoric was “One has to take advantage of these prices.” 

It was the same scenario on the way down, as wheat fell $5, corn fell $2, and soybeans down $3. 
Now as prices have rallied from what appears to have been very early-harvest lows, as mentioned in my latest Top Producer column, same scenario:  no price outlook per se but we “gotta sell something here” because these are good prices, with no attempt at price outlook it seems. Even next Monday’s report is centered on acres planted, harvested acres and yield, focusing mainly on back yard domestic items.

The other side of the equation remains global. What will our importing customers suffer in terms of disposable income due to energy prices and the impending recession that history says has to happen to bring down inflation. The USDA will give a first look at how they see demand. If production slips like guesses seem to indicate, will demand also then slip to offset drop in supply?  It seems rationale to think demand for “stuff” will fall as that is the U.S. Federal Reserve’s focus. Will USDA fly in the face of the Fed’s objective and suggest more food inflation on the horizon?

If supply stays stable or increases while USDA lowers demand, Katie bar the door. It would then suggest that we are already on that path of demand destruction including China as USDA supposedly bases their outlook on facts present or having already occurred. For example, miles driven for June as reported by the U.S. Department of Transportation on Aug. 24 showed miles driven may have already peaked and thus helped create demand resistance for fossil fuels and thus explain the fall in crude oil prices of 33% confirming what technical signals indicated of a top in crude June 14 nearly $40 per barrel ago having nothing to do with the administration’s actions but was due to slowing demand already. Even the Saudi’s refused to increase crude but chose instead this week to announce a cut in crude supplies due to slower global demand. 

This fall in price caught a lot of energy traders globally long and wrong creating the news release that the European Central Bank may have to come up with over $1.5 trillion for margin money for such traders/trade. The most recent reckless opinion I heard was to buy call options and sell put options to finance the trade. 

That is a huge bet that the report will be bullish. If bearish, that trade will result in a lesson not soon forgotten. 

Have a safe harvest,
Jerry Gulke

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Jerry Gulke farms in Illinois and North Dakota. He is president of Gulke Group Advisory Services. Disclaimer: There is substantial risk of loss in trading futures or options, and each investor and trader must consider whether this is a suitable investment. There is no guarantee the advice we give will result in profitable trades. Past performance is not indicative of future results.