Feeding The Bull Everyday: Right Now He’s Emaciated and Starving

Feeding the Bull 510     Like a tall drink of water here we are again.  I only think back about 8 years ago when I was mounting farm rally stages across Ontario.  The cash price for corn was $2.15 a bushel and I used say from the stage that it was unsustainable!   Oh, how right I was.  Little did I know that corn would eventually reach $8 a bushel a few years later.  Needless to say, I didn’t know.  Those were bearish times; we simply planted crops on hope.

So last week when the USDA came out with a record soybean production of 84.8 million acres, the bears filled the playing field.  The USDA had a March 30 estimate of 81.5 million acres and I think just about everybody thought that that number was in play.  However, when 84.8 million acres was announced, it broke the previous record by 7 million bushels.   It was way beyond my expectations and November soybeans broke $.70 on the day.

Corn and wheat dropped too in sympathy with being whacked by the soybeans.  You could even make the argument that corn was slightly bullish.  The USDA came out with an estimate of 91.64 million corn acres, which is actually slightly under their March estimate of 91.7.  The March estimate was largely panned at the time because most analysts expected corn acreage to be much higher than that.  I must say that 91.64 million corn acres surprised me.

In any case, the psychology of the grain market has become even more bearish since the release of the report.  On July 11, USDA will once again chime in with their yield estimates for both corn and soybeans.  It is true that there has been much wet weather in parts of Iowa, Minnesota and the northern plains, to say nothing about the problems that they’ve had in Manitoba and Saskatchewan.   However, generally speaking the wet weather is nothing like the hot dry heat domes of doom, which come to the corn belt once in a very long while.  I see great crops in the United States and until we get fresh news of some very hot weather event descending into the US corn belt, I don’t see that changing.

The point is you have to feed the bull everyday and right now the bull is emaciated and starving.   Of course writing that seems so strange because there has been no talk about the bulls holding any type of position that makes any sense.  The USDA always serves as a flashpoint with their reports and June 30th only served as a vehicle to push prices lower in a hurry.

Clues to the lower prices from the USDA report actually came a week earlier when Statistics Canada released their Ontario corn acres projection at 1.9 million.  Similarly, they boosted soybean acres up to 3 million, which in Ontario is unprecedented, at a record level.  If you took the increases and decreases from the previous year into account, the USDA prediction was plain to see.  The crop looks great in the United States right now and it better remain so especially for corn buyer’s sake.

I say that because it’s entirely obvious that if there is a production problem in corn this year the lows might be in.  However, we are so far away from that.  With July 4th being tomorrow, many traders feel that the crop is made.

So it is what it is and for some of us that’s not so good, depending on how you are hedged.  In Canada, we have the double entendre of the Canadian loonie surging in value at a time when futures are retreating.  There may be a way to hedge that in a very complex fashion but I always think it’s one or the other.  It is hard to hit both at the opportune time.  Many suggest that you should set the futures and keep the basis open in Ontario.  I think that’s quite a good strategy depending on the times but not so good for corn versus soybeans and wheat.  It boils down to understanding the market structure.

In Ontario our corn basis depends on US imports, which often depends on crop size and crop yield.  Of course it also depends on the value of the Canadian dollar.  However, soybeans and wheat are much more sensitive to the Canadian dollar’s value because they are priced directly in US funds.  So hedging your crop in Ontario is doable but certainly a little bit more complicated with the foreign exchange element.

Keep in mind as we move ahead it is always darkest before the dawn.  Yes, there are clichés asunder.   The bears are certainly holding sway in our present grain market, but it will only add gas to the demand fire underneath grains.   Or maybe we should say diesel fuel, because it burns slower.  Someday the bulls will be eating hay again.  It’s just that at this time, it’s hard to imagine.