Weekly Grain Update – November 14, 2017

corn harvest

 

The USDA came out with its November crop report on Thursday and shocked the market with their interpretation of the current crop.  Most believed that bean yields would be lowered and corn yields would be raised slightly from the October report.  This was not what the USDA had in mind, and their report dramatically altered the markets going forward.

In the case of corn, the USDA raised this year’s production by a whopping 3.6 bpa which took their final corn yield to 175.4 bpa.  This is a huge yield and beat last year’s average yield by .9 bpa.  Production was raised by 293 M Bu from last month’s total to a jaw breaking 14.578 B bu.  In addition to the yield increase, the USDA also increased exports by 75 M Bu to 1.925 B Bu.  Many traders are scratching their heads about this number as we are having a very difficult time making increased export sales to foreign buyers today, yet the USDA is projecting a big increase.  Time will tell on whether the USDA is right or not.  But the only way for our exports to increase is through lower prices which none of you will like to see.  When the dust settled, the carryout for the 17/18 corn crop was raised 147 M Bu to 2.487 B Bu.  This is a tremendous amount of corn carryout and an amount we have not seen for decades since the glut of corn in the mid 80’s.  With this amount of corn hanging over the market, it will be very difficult for the market to rally anything significant.  Any type of strength will be met with a huge amount of selling from the country.

On beans, the USDA surprised many by not changing the yield from October’s report and left it at 49.5 bpa.  Again, many market participants were surprised by this as we continued to hear reports of lower bean yields as harvest progressed north this year.  Total bean production was lowered slightly to 4.426 B Bu, and nothing else was changed in the bean supply and demand table.  Bean carryout for the 17/18 crop was lowered by 5 M Bu down to 425 M Bu.  This has been the trend as of late where we start off the year with big bean numbers and either yield decreases or increased exports causes the bean carryout to get smaller and smaller as we move through the crop year.  425 M beans is nothing to sneeze at, but the real question is what will the bean carryout be at the end of the crop year on Sept 1st 2018?  Will it remain over 400 M bu or will it fall towards 300 M bu like the 16/17 crop?  If the bean carryout number continues to get trimmed each month through better export sales to China, then this will put a bid under the bean market.  If not, it could gain momentum to the down side especially if corn is running lower beside it as well.

As I look at the charts, this report did significant damage to the previous price levels.  December corn futures had been trading in a solid sideways pattern for weeks with support at the $3.44 level and resistance at $3.55.  The USDA’s numbers changed this.  Previously, the December corn futures had a low of 3.42 ¼.  As soon as the report was released, December corn futures broke through this support level and made a new low at $3.40 ½.  The problem is that we now do not have any previous support levels under the market until $3.15!  This was the low of December 2016 corn futures made last fall.  Consequently, corn busted lower and now is trading in the narrow range of $3.41 to $3.45.  Many times after a market corrects lower, the market will go up and “kiss” the previous level good bye before it retreats and then moves lower.  In this case possibly significantly lower.  If you have bushels that must be sold, I would put targets in around the $3.43 level for December corn futures and get it locked in now.

The report also pushed the bean market lower as well.  January bean futures were in a nice upward channel and were resting on the lower side of the channel at the level of $9.90.  The market was looking for a yield reduction and big decrease in bean carryout.  This simply did not happen.  After the USDA made virtually no changes to the bean yield and carryout, beans broke lower and broke out of this upwards channel.  Instead of beans moving in an upwards channel, they are likely going to move in a sideways pattern with support now at $9.75 and resistance at the $9.90 level.  Again, the market may very well go back and “kiss” the previous level goodbye at $9.90.  This is the level I would place targets vs January bean futures and a level I would be a significant seller if needed to sell more cash beans.

As we are coming out of bean harvest, the basis on cash beans has been steadily improving over the last week to 10 days.  As the vast majority of the country is now finished with bean harvest, the demand for barge and rail freight is easing, and these gains are mostly reflected in improved bean basis.  We have seen a huge improvement in bean basis for facilities tributary to the Mississippi River, and as harvest works its way north, these improvements in basis will also work north as well.  The farmer is not selling nearly as many beans today vs 2 weeks ago, and this lack of buying from the market’s perspective only pushes the basis to improve all the harder.  China is still buying beans out of the Gulf, and the market still needs beans.  A lower futures level will just enhance the strength in bean basis.

Corn harvest is not as advanced as bean harvest.  However, corn has been relatively hard to buy from the farmer so far this harvest.  In addition, many areas never had a “gut slot” harvest activity because the harvest is so spread out, taking almost twice as long as a normal harvest in many areas.  This relative slow harvest pace combined with relatively slow farmer sales, has the corn basis relatively firm in many areas.  Although harvest is not over yet, we could see some basis strength in corn if the weather turns sour or futures continue to work lower.  If the farmer digs in his heals and locks the bin door after harvest, the basis could improve, maybe significantly in many areas.  If the futures can’t do the work, the basis will be forced to carry the load to encourage farmer movement.

As always, if I can help you with anything, please call me at Readfield.

Marcus

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