USDA Report Sets the Stage for Another Market Showdown

After a welcome three-day Labor Day weekend break, the markets ended mixed with wheat trading higher on no progress with negotiations in Ukraine and Russia, while corn was modestly lower. Beans traded on both sides of unchanged but did end with decent gains. With US representatives offering ideas to both Ukraine and Russia in separate meetings, the goodwill only lasted until the US representatives left Russia before attacks from both sides resumed. The US and Iran exchanged fire over the weekend which spiked crude oil back over $94 a barrel and diesel to another round of new all-time highs. The world political picture remains extremely volatile and supportive to both higher raw material prices and world inflation. The short trading week will quickly get us to the USDA’s September yield update on Friday.

News and Notes:

• The excessive heat of the last month is forecast to break this weekend with most of the Corn Belt expecting more seasonal and even cool temperatures starting soon. Better rain chances are also forecast for most of the Midwest and south. The welcome pattern change will not help add bushels to final yield, but it will stop the excessive heat stress to maintain current yields.
• The daily chart for December corn is on Page 2 and shows the comfortable relationship the daily trade is having between $5.35 ¾ to $5.37 ½ as each daily trade for the last 9 sessions has traded somewhere in that range. But with the contract high of $5.49 ¾ and the 9-session low of $5.26 ½, the trade has decided this is a very comfortable spot on the charts to anchor their boats heading into the report. The funds were reported on Friday as holding a record long futures and options corn position of 2.155 BBU, or nearly 400 MBU above expected US ending carryover. Between all grain and soy markets, the funds are holding their largest total bullish position ever. This is both a blessing (fund buying was a huge part of the sharp rallies in August) and a potential curse if something comes along to spook the funds into selling a large portion of their positions. Be ready for more volatility.
• Last week’s trip to the Iowa Farm Progress Show produced a few good interviews about the markets and new products to help increase your yield and efficiency. Please listen to my first appearance on Talk Dirt to Me. Thanks Logan, Bobby Lee and Austin.
• Weekly crop conditions fell 1% to 56% in corn and were unchanged at 58% for beans. The late August and early September heat have clearly taken a toll on the crops and the potential yield. The USDA addressed this in the August report, it will be interesting if they follow the weekly crop ratings with even smaller yields on Friday, especially considering Illinois crops are rated just 55% and 57% G/E.
• Friday’s USDA report is the major concern for the markets as any yield increase (less than 5%) or even unchanged yields (20-25%) lean bearish to current prices considering the massive fund length. With the odds leaning toward modest reductions, it is always hard to know if the market just shrugs off the small cuts off or is disappointed the USDA did not get more aggressive. The only wildly bullish yields would be cuts below 176 BPA for corn and under 52 BPA for beans. If you are thinking about either buying calls to protect upside on bushels that will be sold and delivered at harvest or setting a floor for those that will be stored, please call us. It takes several days to get a new account open, it is a little shorter to transfer an account, but if you have a funded account and need to hedge your exposure, please put some thought into if adding option strategies during harvest makes sense for your operation.

A slower and calmer trade would be a great thing into the report to calm everyone’s nerves before what is sure to be another storm of information leading to quick decisions shortly after the report. The good news is that the crop is definitely not getting any bigger, the bad news (potentially) is that the funds have an historic long position and the market is running short of natural buyers to absorb any fund selling if the decide to take profit during any post-report rally, or just all run to the exits on any bearish development. Hedge selling at the highest prices in years during harvest is inevitable, so finding enough buyers to absorb that selling will be the key moving forward. With peace on either front nowhere in sight and the US/China trade meeting almost too close to run into any trouble, Friday’s USDA yield update becomes the immediate trading wrinkle.