Weather, Weather, Weather!!! Whether the markets go up or whether the markets go down all depends on the weather. We are in that time of year again where weather scares are driving the market action and volatility. These past few weeks have not disappointed. We’ve seen a quick price rise over the past few weeks with a good-sized pull back these last 3 days in corn, soybeans, and wheat. With the weather backdrop we have the push of the managed money vs the pull of excess supply battling for the near term direction of the markets. For those that want to invest in these exciting grain commodities outside of the futures market, Teucrium has a number of ETF funds that provide access to the corn, wheat, and soybean markets. These ETF funds provide unlevered direct exposure to the related Chicago Board of Trade (CBOT) futures markets. These are the Teucrium Corn Fund ETF (NYSEARCA:CORN), the Teucrium Soybean Fund ETF (NYSEARCA:SOYB), and the Tecrium Wheat Fund ETF (NYSEARCA:WEAT).
Rain Makes Grain
As the saying goes rain makes grain. Looking at the drought monitor (below) we see continued dryness through some of the prime grain states of Nebraska, Iowa, central Illinois, and especially in the Dakotas. I can attest to the dryness in Iowa. I was kayaking down the Raccoon River outside Des Moines this weekend and the water levels were really low. Looking at the 10 day forecast we currently don’t show much chance of rain for central Iowa for the next 7 days. In addition to the lack of moisture high temperatures are expected to get into the 90’s for the next 10 days and low temps are only going down into the 70s at night. So the most important thing the market will be looking at to start this week is the weather outlook and the chance of precipitation especially in the drought areas.
Managed Money is getting Bullish
After having some of the largest short positions ever across the grain complex, managed money has become net long in corn (117k), soybeans (9k), and wheat (53k). This is according to the latest Commitment of Traders Report released Tuesday.
The COT Report shows the level of net activity either long or short of the various players in the futures market. Extreme levels of activity potentially indicate turning points in the markets. We tend to look at 2 main players which tend to mirror each other.
- Producers are the commercial entities that use the futures market to hedge their price risk. For example, If a grain elevator is buying soybeans and they do not have a physical sale they will sell futures as a substitute sale until an actual sale is made. Producers are both long and short either the physical or the futures so as such they do not take directional risk in the market.
- Managed Money are the hedge funds and institutional investors that are the speculators in the markets. They provide liquidity by taking the other side of the trade from the Producers.
We like to look at extremes of Producers and Money Managers positions to indicate possible tops and bottoms in the markets. You’ll see in the charts below that we’ve seen relative lows in the managed money long position in the past few months. We now see a more bullish position led higher by wheat.
Corn Commitment of Traders: Source: Barchart.com
Soybeans Commitment of Traders: Source: Barchart.com
Wheat Commitment of Traders: Source: Barchart.com
Large Ending Stocks across the grain complex
If the weather holds out the USDA is expecting the corn use to basically balance with production. This leaves the corn ending stocks roughly the same levels as last year. If that is the case you could reasonably expect the corn price to maintain roughly the same range as last year over the medium term. Short term the animal spirits have the potential to move the market higher.
The price of CORN has been range-bound between $18 and $20 over the past year. After hitting just over $20 this past week, we’ve seen CORN pull back about 5% just this week to near the $19 level. So it’s anyone’s guess where the market goes from here.
The forward curve in corn is favoring downward pressure on the price. If the price of futures are more expensive in later delivery months then we are said to be in a carry market.
Looking at the corn yield trend we can see the tremendous improvement in yields over the years. This year the trendline yield is close to 165 bu/acre. With the anticipated yield of 170.7 bu/acre that would make 4 years in a row with much better than trendline yield. That is not the normal case in fact we’d have to look back to the mid 1980’s to see 3 sequential years of much better than trendline yield. But with that being said, it doesn’t mean that this year won’t be more better than trendline yield.
Corn cash price remains below the cost of production for many parts of the country. With any of the commodities the difference between the futures price and the cash price is called basis. Mathematically we can write futures price + basis = cash price. So just because the futures price goes higher does not necessarily mean the farmer is seeing the same level of increases in the cash price that he gets paid. For example, the basis can be getting weaker while the futures price is getting strong leaving the cash price the same. We can see from the chart below that cash price in western Iowa has ranged between $3.20 and $3.50/bu for 2017. Depending on a producer’s crop rotation and the many factors of production ISU expects the cost of production for an Iowa producer to be between $3.50 and $4.00/bu. If that indeed is the case there is very little potential to be profitable with the cash prices at these price levels. You can read about it in Estimated Cost of Crop Production in Iowa – 2017.
Source: USDA – Agricultural Market News
Soybeans are especially interesting. At first glance it looks very similar to corn where the supply and demand are basically in balance. But, if you examine the report a little closer you'll realize the only way soybeans are able to stay in balance is by the greatly expanded soybean planted acres. In fact this is the largest soybean planted acres ever by over 5%. If the planted acres fell in line with historical norms carryout would be very tight in soybeans. This should lend some longer term support for soybeans as you can't expect future years to have this same level of planting.
We see some of this bullishness in the price of soybeans. The soybean price although starting from a lower level has not given back as much of it's gains as corn. So maybe the pullback this week in soybeans was a little overdone. From a technical perspective it is not unreasonable to expect SOYB to fill the gaps in the chart.
Unlike last year the forward curve in soybeans is also in a carry though Jul 18. There are many times that the soybean market is backwarded meaning the near term futures price is more expensive than subsequent futures delivery months. Backwardation is the futures market telling the producers to bring their product to market now.
Wheat is also similar to corn and soybeans. The supply and demand are nearly balanced. Unlike soybeans however the wheat planted acres are being reduced. This is because the wheat price has been so depressed because of a global over supply. Due to these depressed prices, producers are growing wheat at a significant loss thereby reducing planted acres.
You can see that wheat prices have led the rally in grains and approached the 1 year high before pulling back. If the wheat market can break through this near term resistance then it is likely to continue running higher in the medium term.
It's normal for wheat to have a healthy forward curve as it does currently. This does not yield much additional information for the current wheat market.
Weather remains the near term driver in the grain complex. The next few weeks will be critical to the near term direction of the market. The managed money have turned decidedly bullish in the last week lending support for the market to run higher near term. The excess supply in all the grain markets should dampen any significant upside for the medium term.
Disclosure: I am/we are long CORN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained in this article is taken from sources believed to be reliable, but is not guaranteed by AgTrades, LLC, nor any affiliates, as to accuracy or completeness, and is intended for purposes of information and education only. Nothing herein should be considered as a solicitation to trade commodities, equities, or a trade recommendation by AgTrades, LLC. Futures, equities, and options trading involves the risk of loss. Past performance is not indicative of future results.