Market analyst: The bull runs

Ray Grabanski
Special to the Farm Forum

Just when you think the market can’t go up, it does! That’s exactly what happened this Aug. 12, the day the government released perhaps the most bearish monthly report they’ve ever done - whammo, the market reverses and goes higher. We’ve had follow through strength, too, and now we are starting to find out the reasons for the market to turn around, as like always fundamentals are behind technicals (which reversed two weeks ago).

The weather has also turned, with crop conditions starting a steep decline about the time of the Iowa/Illinois/Indiana storm that hit 14 million acres of corn and soybeans. Recently, dry weather is the problem in much of the corn belt, depleting soil moisture and eroding yield potential. Current weather forecasts have pushed a little wetter in the next week for the eastern two-thirds of the corn belt, as the “hurricane alley” portion including Louisiana, Arkansas and Tennessee provide surrounding states with normal to above normal precip. These three states are forecast to see some heavy precip that could cause some crop damage, but the current dry soil situation will be improved in surrounding states. The 8-14 day forecast, though, remains mostly dry with below average precip. Temps will be above average the next 7 days nationwide, but will cool seasonally in the 8-14 day forecast. Its raining in parts of Wisconsin and the Delta on Tuesday, but otherwise is mostly dry in the already dried out corn belt.

The recent dryness has taken its toll on crops, with corn conditions down 5% on Aug. 24 on last week’s dry weather. That caused a 2.2 bu/acre drop in the corn yield model, down to 178.5 bu/acre vs. USDA’s recently hiked 181.8 bu/acre. So we have a yield 3.3 bu or about 270 mb smaller than USDA already, and its now dropping 2 bu/acre per week (165 mb). By the end of the growing season, this could end up a 172 bu/acre crop, which would mean a cut of 10 bu/acre or 840 mb from stocks, leaving us with 1.9 BB of carryout. More importantly, the 3% decline in soybean conditions resulted in a 0.31 bu/acre cut in yield to 50.7 bu, now well below USDA’s ill-timed 53.3 bu/acre estimate in August (right before yields begin to decline). In soybeans, where weather still has much to play in podding and filling soybeans, the yield potential could continue to decline for a few more weeks at this pace, with a yield of 48.3-49.3 bu/acre possible this year. If we dropped to 48.3 bu/acre yield, that 5 bu/acre decline could result in carryout dropping below 195 mb — now a tight carryout number.

The nonchalant hike in production numbers by USDA to ridiculously high numbers in August is starting to look negligent. Of course, it will probably take them until January to trim these numbers back to anything close to 172 bu/acre corn or 48.3 bu/acre soybeans — but at least it’s a start. The market seems to rather enjoy making USDA look like fools — after all, it reversed higher the day of USDA’s ill-prepared August report, and ironically, the weather also seemed to shift into a pattern that is trimming yields rather aggressively.

The other interesting numbers in the weekly crop progress report covered soil moisture, with topsoil dropping a huge 10% rated adequate/surplus to only 49% rated adequate/surplus (compared to 68% last year), and subsoil down a huge 8% to 54% rated adequate/surplus (vs. 70% last year). Its becoming painfully obvious that the 2020 crop is finishing in poor moisture conditions, and that will trim yields of both corn and soybeans (but soybeans will be trimmed more percentage wise).

We are starting to see why the market has turned bullish on Aug. 12 — just when USDA painted the darkest picture of the crop. Note that China and the U.S. reiterated their commitment to the Phase I trade agreement on Aug. 24, giving the market an additional boost (remember when all the so-called experts said China could never honor their commitment?). Finally, some good news for the grain markets.