The Rally Pauses, But the Bulls Aren’t Leaving

After days of strong rallies and new contract highs, the markets took a modest breather today as prices made new contract highs for corn and beans in the overnight session before a round of profit taking and farmer selling pushed prices to lower closes by the end of the day. With important psychological price targets nearly hit overnight; $5.50 Dec corn, $13.25 Nov beans and $8 Dec wheat, today’s small setbacks were not a complete surprise. Today’s trade was also a victim of a lack of another bullish headline from the Black Sea or US corn yield, and bull markets need to be fed every day. Thursday’s weekly export report should be solid after the flurry of recent Chinese bean purchases and lead the trade into a period of positioning for the 3-day Labor Day weekend coming up. With prices at such high levels and the funds so heavily committed, there is growing risk of a headline story or tweet that produces a wave of selling, but if today’s wide-ranging trade with only modest losses is an indication, there are plenty of buyers waiting to buy into any correction.

News and Notes:

• There is little relief in sight from the record late summer heat and dryness throughout the S Plains, Delta and the lower Midwest. The noon forecasts are now looking past mid-month and other than some irregular rains in the NCB, the finishing forecasts are not great. The heat is pushing crop maturity at the expense of fill and yield, and once you get into the last 10-days of September, the US growing season weather will be a non-factor, and dry weather would be preferable for corn dry down and harvest. US weather remains a bullish factor.
• The December corn daily chart is on Page 2 and shows today’s modest setback after setting another new contract high in the overnight session. Corn, beans and wheat have all been on amazing runs over the last 3-weeks, and today’s modest setbacks barely even register on the charts. The bottom section of the chart shows the relative strength index and by every measure the corn market (also beans and wheat) are significantly overbought (shaded blue area) which is a warning indicator (like a check engine light) but does not mean anything is significantly wrong with the rally. The charts are beginning to look a little tired, highlighted by today’s lower morning openings, mid-day rallies and lower closes, but a few days of consolidation and even a solidly lower day (gasp) would be healthy for the markets and potentially set up a strong base of potential buyers. With Midwest harvest on the horizon, the cash and physical markets will well supplied in 6-weeks, which would allow the markets natural sellers (farmers) to produce selling volume that has been largely absent in the last month.  
• Weekly ethanol production numbers were 3% ahead of last year and easily large enough to stay on pace for USDA corn used for ethanol predictions. The weekly US gas inventories continue to shrink which not adds a bullish story for gas prices, it makes the blending margins even more attractive. The US farmer benefits from higher gas and diesel prices simply by corn and beans involvement in the bio-fuel production industry. No one likes high gas prices, but there is an easy to spot silver lining in them for US farm income.
• China was announced as a buyer of another 8 MBU this morning to keep the momentum going on US exports and Cina’s adherence to their bean purchase pledges earlier this year. With every Chinese purchase, the small concern that China could back out of the trade meeting shrinks even more. The trade summit with China will begin 3-weeks from tomorrow in Washington and although US ag is not the lead topic, it will be an important component of the negotiations. Controlling AI, availability of the latest computer chips and China’s regional political actions are the top points of the meeting.
• The fund participation has been a major source of buying volume over the last month and the early numbers indicate the funds are holding their largest ever net long corn position. Before today’s minor correction, the funds were thought to own over 410,000 contracts (1.6 BBU) of corn, barely eclipsing the old record established in 2022 of 409,000 contracts. The flow of speculative money into our markets has been unprecedented over the last 6-weeks as non-ag traders see incredible demand, a shrinking US corn crop and a super El Nino weather pattern for the southern hemisphere growing season as great reasons to be long the grains and soy. Projecting just how much money the funds could dump into our markets is fruitless, because they can move to other alternative investment vehicles. But, with the funds flat the wheat markets, a roll of some of the length from corn to wheat would keep them involved in the bull market and help them move into a far less crowded trade.

During the winter meeting season early this year, the main question I got was about how will corn make a run back to $5? But, after the war drove up energy prices and the Black Sea war got more destructive to port shipping infrastructure, the $5 mark was eclipsed. While price did not initially stay above $5 for very long, since the August USDA report, prices have easily blown through that resistance and after a 90-cent plus rally since, the question has changed to how can corn make a run $6? While the same factors (war, lower US yield, record demand) remain the biggest variables, a new question has come up. What is the Black Swan event or events, that can end the party? The very simple answer is Peace. It does not seem very humane to want conflict, but the two wars are big components of this rally. If Russia and Ukraine agree on a lasting cease fire and reopen the Black Sea export corridor, wheat prices will tumble taking down everything in their wake. If just the Straits re-open, the energy markets will have a substantial pullback, hurting margins and pressuring corn and bean oil prices. While the odds of either or both ending soon are very small, they still exist. No one thought Russia would allow the humanitarian export corridor in 2022, but they did and wheat prices fell over $2 a bushel in just a few weeks and much further in the months to come. The reason they are called Black Swan events is they rarely happen and are never expected. I am not turning bearish about the markets or the bullish reasons why we have rallied, but you have to consider what could happen. Continue to make small scale up sales.