China Buying Confirmed as Heat Threat Keeps Grain Rally Alive

The markets were much calmer today with prices drifting on either side of unchanged for most of the session before the mid-day forecast extended and expanded the upcoming heat dome. There was confirmation from both Chinese and US sources that on Monday China purchased 8-10 cargoes (16-20 MBU) of US beans and potentially purchased an additional 40-50 MBU of bean futures to lock in the lower price while the news was breaking. China is always shrewd about their strategy and timing of large purchases and after seeing last week’s neutral USDA acreage report and getting concessions from the US trade team on other issues, China moved aggressively. The daily sales announcement did not include any Chinese purchases, but it is expected in the next few days. The noon US weather forecasts kept enough heat to keep everyone on edge, but with other northern hemisphere grain producing nations reporting significant weather issues, the market is trying to balance both extra global demand and additional yield loss.

News and Notes:

• The overnight and mid-day weather forecasts remain consistent with June’s heat down rebuilding in the WCB and S Plains with the expectation of it creeping east by mid-month. Temperatures of 90-100 will be seen with decreasing rain chances just as pollination hits full speed. Europe remains in a record summer drought with the excessive heat returning for the next 7-10-days. Northern hemisphere’s growing weather is not good for the next few weeks.
• The daily Nov bean chart is on Page 2 and shows yesterday’s massive breakout and today’s very solid trade that made another new 5-week high before settling into a calm two-sided trade. The lack of a deeper break after Monday’s 44-cent rally is a great sign that this was not just a one-day overreaction. It is impossible to determine how many November, January and March soybean futures contracts the various Chinese grain buying firms bought yesterday, but it was substantial. How and when those same firms buy the cash and lift those futures hedges will add a confusing layer to a bullish sales announcement by the USDA. Today’s early rally toward $12 ran into decent farmer selling as the big round numbers always have standing sales targets nearby. The markets are approaching overbought, but they can remain overbought for as long as there is bullish news to bring in buyers.
• The weekly crop conditions fell as expected with corn unchanged at 67% and beans down 2% to 64% after last week’s brutal heat. Corn pollination advanced to 16% through Sunday and should nearly double by next week with 34% of the bean crop is blooming. The next 6-weeks of US weather is critical to a crop that has endured more stress than any crop in the last 4-years.
• With three weeks of crop ratings, our Wingman yield model has enough information to begin to narrow down to a prospective yield for corn. It is too early for bean ratings to have any correlation to final yield. Our basic premise is that for a 183 national yield to be achieved, national crop ratings need to exceed 70%. Last year’s same week ratings were 74% with a final yield above trend, so this year’s rating of 67% does not calculate out to a trend+ yield. Our favored model is estimating yield at 181.1. This estimate is based on the state-by-state crop conditions, % of total acres versus national planted total and level of crop stress by state. The model has had good success in recent years following crop conditions to estimate final BPA yield.

After Monday’s very welcome rally, today feels rather boring. That is a good thing. Weather markets are predictably unpredictable as they can accelerate quickly or disappear entirely with each new forecast. On the other hand, demand rallies tend to have a much longer runway and can stay around for many months, especially if paired with only moderate world yield loss. The combination of both would setup a market with several legs of support (strong demand and tight world ending stocks) that may not be solved until Brazil and Argentina’s crops are safely big enough to replenish world supplies, which would not until be next March or April. The slippery slope of marketing in the extreme volatility of what could be a major market transition is trying to balance being opportunistic on the rallies but also understand that a further weather problem could send prices much higher. Please call us about option strategies to address those concerns.