Coming into this week, I have a lot on my mind, with the biggest of course being what it takes to change the trajectory of the grain markets.
The conversations I’m having with farmers across the country are reminiscent of the spring of Covid. Prices that spring had never presented an opportunity to sell grain at a profit, with relentless pressure seen from the start of the year and present throughout much of the growing season. This caused immense stress on the farm and ultimately led to decisions to liquidate inventory at multiyear lows for many.
It feels reminiscent of that spring as well when looking at what traders are expecting for new crop ending stocks. With the USDA Outlook Forum next week, talk of corn carryout near 3 billion bushels, and chatter of 450+ million bushels for soybean ending stocks next year is starting to circulate as well—though I can’t help but remember the last time these figures were seen as a lock and what happened next, but more on that later…
Right now, when looking at corn and soybeans it feels like both are incredibly oversold. March corn has lost over $2.00 a bushel from its summer highs, 42 cents of which has been lost in the last 6 weeks. Funds have amassed a near record short position as of last week’s commitment of traders report as well. In soybeans, the March contract has also lost over $2.00 from its summer highs with nearly half of that coming since the start of the year. Funds are closing in on their record short in beans as well, sitting less than 20,000 contracts from it as of last Tuesday.
While I wait for the catalyst that pushes funds to cover their shorts, my attention has started to wander elsewhere. Yes, I’m still closely watching cash market developments, but with both Brazil and China on holiday this week for the most part, we’ll likely not see anything major happen there either.
China
What the heck is happening in China? Is a question I ask myself multiple times a week. My optimism we would soon see some sort of major stimulus package announced proved premature, as Xi seems more focused on staying the course than putting in a floor.
Many outside market watchers were excited over a meeting between Chinese leaders and the country’s Securities Regulatory Commission midweek, only to discover the conversation was not about stimulus but instead resulted in a major change in leadership. Xi has worked tirelessly over the last 5 years to consolidate economic power at the top and to root out corruption, with some of the regulatory changes implemented said to be behind much of the cash pinch seen in the real estate development industry.
China’s new market head does not appear to be speculator friendly, nicknamed the “broker butcher,” he is mostly known for cracking down on insider trading and working closely with the country’s top leadership to root out corruption.
While I won’t pretend to understand all of the inner workings of Chinese political leadership, or their economy, I feel it has become clearer over the last handful of weeks, that Xi is willing to work through more economic pain.
In addition to what leaders are doing when it comes to investments in China, talk is starting to circulate that Chinese investors are feeling pressure to bring their money back home as well. Some of this conversation is what has led to renewed pressure in the regional banking industry, as a commercial real estate crisis is said to be brewing.
Does Commercial Real Estate Matter to Grains? I honestly have no idea—and that is not me being facetious in the least. I’ve spent some time the last several days reading about the situation in the commercial real estate industry and find it fascinating. Living near Lansing, Michigan, the conversation about empty space and potential major write downs in valuations does not seem surprising, as commercial space feels plentiful with more space still under construction.
Talk that there are trillions of dollars of debt in the commercial real estate industry that cannot properly be valued due to a lack of transactions is shocking to me—buyers are seemingly non-existent. Experts say it’s not that there aren’t buyers, it’s just that no one is willing to pay the values owners say their space is worth. This has created a market standoff many feel will break this year as owners find themselves forced to liquidate.
Some say this could result in a contagion style failure starting in Europe and making its way into the United States and beyond.
As with any other potential market development, I will take the talk of what’s at stake here with a grain of salt. However, when looking at the situation in China and then hearing stories of Chinese investment groups being forced to liquidate international holdings, sometimes at a major loss, one can’t help but wonder if this isn’t the next subprime mortgage style debacle.
Whether it is the disaster many claim remains to be seen, though of course if central planners start to feel it is, rate cuts are likely to soon follow.
Ag Outlook Forum
The last big thing that is on my mind this weekend is this week’s USDA’s Ag Outlook Forum. While it is always on my mind this time of year, this year proves different as I have been invited to speak at the event and am doing my best not to spend 45 minutes depressing the crowd. As is the case every year, the Outlook Forum is a gathering of all kinds of industry and political folks from around the world, coming together to discuss what United States agriculture looks like for the next handful of years.
As mentioned, this year’s outlook is expected to bring with it massive growth in next year’s projected ending stocks, with traders saying corn carryout is likely to grow beyond 2.5 billion bushels, with soybean carryout exceeding 450 million bushels.
Some say the release of these numbers in the coming week will push speculators to sell more, something I struggle with considering it has already been a topic of conversation for months and is likely priced in. While I don’t think this week’s numbers will prove surprising, I do feel they will prove daunting, both when it comes to pricing and accomplishing what the USDA will say we’re going to do.
With meteorologists calling for a quick transition from El Nino, which is expected to end sometime between April and June, to La Nina, which is set to start sometime between June and August, weather will likely have something to say about the record yields the USDA will project next week.
With so much left unanswered yet when it comes to how the next several months will play out, next week’s numbers provide a nice, soft starting point to the year’s supply and demand estimates and should viewed as just that.
Looking Ahead
I will be watching the front month corn and soybean spreads over the next couple of weeks, as time is starting to run out for folks with unpriced basis contracts versus the March board. The roll or price date is coming soon, with many farmers having taken a big hit on a roll once already, only to watch futures drop significantly since they delivered the bushels. This will likely start to pressure the front month over the next couple of weeks. Whether this results in a big uptick in farmer selling remains to be seen, with reports this week that some are starting to liquidate bushels after Thursday’s USDA numbers were seen as less than supportive.
I will also be watching for signs Chinese buyers will look to return to the market after the Lunar New Year celebration. Basis values in Brazil have firmed recently as the big push to move old crop inventory ahead of harvest has started to fade. Farmers have been holding tightly, with private crushers in China seeing positive margins for April/May shipment out of Brazil for the first time in several months.
As always, don’t hesitate to reach out with any questions. Have a great week!
More Grain News from Barchart
New Life of Contract Lows for Corn Futures
Soybean Futures Fall into Weekend
Chicago Wheat Found Friday Strength
Cocoa Prices Continue to Post Record Highs on Scant Global Supplies
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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