Tightening Stocks Keep the Bulls in the Driver’s Seat

The new week started with a less volatile, choppy two-sided day of trade as world traders reacted to Friday’s USDA report and tightening world stocks in corn and beans. Corn and beans bounced modestly while wheat was lower on a Russian/Ukraine pledge to stop bombing energy and port infrastructure. Other news was limited which kept volume on the modest side, but an excessively wet forecast for Iowa did bring in another layer of concern that harvest problems could develop from the flooding rains. With confirmation that domestic and world demand continues at a record pace, and the US crops are not going to get any bigger, the trade has to now work out how to motivate additional world planted acres and slow demand. The normal way to accomplish both is for higher prices. This afternoon’s US crop conditions are expected to fall 1-2% again to confirm USDA yields.

News and Notes:

• After all the late season dryness and the poor end to the season, heavy, flooding rain is expected for all of Iowa and parts of their border states. The growing season has been very inconsistent, and this will not help the only state that both good crop ratings and trend line potential. Excessive heat will continue from Texas/Oklahoma through the Delta with no meaningful rain in the forecast.
• The December daily corn chart is on Page 2 and shows the volatile report day trade last Friday and the test of the 20-DMA (red line) at $5.24 3/4 both Friday and today. The funds are still holding a massive, long position, but other than the occasional bout of profit taking, the funds still have their bullish factors in place to remain in the trade for as long as they can. A choppy trade is likely to develop between the 20-DMA and the Sep 2^nd contract high of $5.49 ¾ into the trade meeting with China.
• There were no daily export sales announcements, but the weekly shipping pace remains consistent for the current record sales totals. Ethanol and bio-diesel margins remain strong and show no signs of contracting. No news is good news leading into the China trade meeting, as everything continues to be on track. Daily Chinese purchases should continue into the meeting.
• Russia and Ukraine apparently have agreed to stop attacks on energy infrastructure. The news sent diesel futures lower after an early rally toward $5. The record diesel prices have been largely due to Russia’s loss of about 50% of their diesel refining capacity because of the war. Russia is the world’s largest refiner and exporter of diesel, so this would at least stabilize the market. Unfortunately, it will take years to bring that refining capacity back online. Diesel prices should stabilize, but I do not think will take prices back to normal levels.
• Of all the numbers that were adjusted in Friday’s report, the one that caught my eye was the corn stocks to use ratio. The ratio fell from 10.12% to 9.68% on the yield cut. A sub 10% stocks to use ratio equates to corn prices above $5.50, with $6 not out of the question if the yield falls further in the October USDA update. For beans, the stocks to use ratio fell below 7% (6.78%) for the first time in over 3-years. The global balance sheets are tightening on both yield loss and exceptional demand.

With the USDA staying consistent on several announced report upgrades, they seem to be slowly regaining the markets trust. With their consistent planted acreage numbers from August to September and their yield estimates easily in line with private estimates, history has shown that once the USDA begins cutting yield (especially corn) the updates in subsequent reports tend to go lower as well. Many analysts think corn yield is in the 176-177 range, which would not make for huge adjustments by the USDA, but if realized it would take another 150-180 MBU off US ending stocks and further tighten the stocks to use ratio. Market consolidation with a bias to the upside remains our outlook. Sell rallies as needed to take some harvest straight to town but look at the solid storage carry in the market as helpful for year end tax and pre-pay planning.