Market Analyst: Bullish 'mob' mentality?

Ray Grabanski
Special to the Farm Forum

We seem to have developed a bullish mentality in the marketplace now after six years of extremely bearish sentiment.

For some reason, on Aug. 12 when the U.S. Department of Agriculture told us we’d never have to worry about a shortage of grain again, prices started to go up. And go up they have done ever since that time, with more than $5 gains in soybeans and about $2 in corn. Not bad for just a few months. A lot of very good things have to happen to cause that, and a great factor is the almost reckless spending the U.S. government has adopted due to the pandemic. Both monetary policy (zero interest rates for another three years?), and fiscal policy (spend like a drunken sailer?) are expansionary. That means inflation, or more accurately for now, maybe stagflation. Look up that word - understanding that definition will be important the next few years to your success.

The USDA report Tuesday gave some bullish fodder for traders to chew on, with the biggest surprise the yield reductions in corn and bean crops (down 3.8 bushels per acre for corn and down a half bushel per acre in soybeans. Pro Ag has been saying since November that soybean yields were at least a half bushel per acre too high yet, but the corn reduction was a surprise to everyone. Corn goes limit up 25 cents Tuesday, and trades another 8 cents higher in synthetics, only to see that expand to 17 cents in overnight trade for a net gain of 42 cents in 24 hours.

USDA scrambled to come up with soybean carryout stocks, using the unusual category residual to add 13 millions bushels to the ending stocks number, and added 20 million bushels in imports to keep carryout at 140 billion bushels (about 5 million bushels more than some traders expected). But where are we going to import soybeans from? If South America has a bad crop as projected, China may have already bought most or all of it. So do we buy it from China? The desperate attempts by USDA to keep carryout at 140 million bushels were obvious to traders, especially when they are hiking prices already substantially in both corn (up 20 cents) and soybeans (up 60 cents) to “ration” supplies. In soybeans, the net production cut by the yield reduction was 35 million bushels, and with hikes in exports (30 million bushels) and crush (5 million bushels), they had no choice but to use “fudge factors” to manipulate the numbers to look better or they would have been at 105 million bushels carryout, which still is too high compared to reality. Notably, USDA did not reduce Brazil’s 133 mmt soybean production number, even though many are talking in the mid-120s already. There’s a lot of work to do here yet, especially when you consider USDA cut Argentina only 2 million metric tons to 48 million metric tons - and more is to come yet based on private estimates.

Corn also had a bullish report, but not by reducing South American crops significantly as expected, but instead reducing U.S. crop yields 3.8 bushels an acres to 172 - a shockingly high reduction this late in the crop year. Boy, USDA really laid an egg in the August report with huge production hikes to record large yields, forecasting a giant/bumper crop.

In hindsight, it’s been reversed every month since then to now a below trend yield, which means whatever method they used to forecast in August should be abandoned forever as it was a huge error.

The 325 million bushel reduction in yield meant USDA had to concoct an assortment of rationing measures, including hiking price projections 20 cents to $4.20, reducing feed 50 million to 100 million bushels ethanol, and decreasing by 100 million bushels exports to arrive at only a 150-million-bushel reduction in stocks to 1.552 billion bushels. But that is a facade, and traders well understood it as even though stocks were only 45 million bushels below traders’ expectations at 1.552 billion vs. 1.597 billion bushels expected, prices went limit-plus up anyway. The problem comes in the world numbers, as USDA only cut Argentina production 1.24 million metric tons, and Brazil 1 million metric tons from last month despite adverse weather that has private cuts two to four times larger than USDA’s. So more bullish information is yet to come.

Wheat had mixed numbers, with winter wheat planted acreage larger than expected at 42 million acres (up 0.6 million from expectations and +1.6 million from last year), but at current price ratios more acreage than normal will be grazed out and planted to corn and soybeans. I would not be surprised to have 1 million fewer winter wheat acres harvested than 2020. Wheat ending stocks were cut 25 million bushels as we have to feed it given the tighter corn stocks. That led to a 25-million-bushel reduction in ending stocks, more than the 5 million bushels reduction expected. Wheat is still following corn and beans higher, not leading, as corn and beans are bidding wheat acreage away to other alternatives. And that is the most bullish thing wheat has going for it.

Weather forecasts continue to suggest better weather in South America, especially in Brazil where above-normal precipitation and below-normal temps are forecast for the next seven days. Argentina also will see normal precipitation and temps the next seven days, but will turn less favorable in the eight-to-14-day forecast, with mostly above-normal temps and normal precipitation. So while weather is improving, there still might be some stress in Argentina. However, the improving forecast the next seven days also suggests a weather pattern change might also be in the offing.

The market now has a “mob” mentality to the bullish side - or should I say “peaceful protestor” mentality? I guess what words you use to accurately describe it these days depends on your point of view. Maybe I should contact Big Tech to explain how to distinguish? I can’t tell the difference.