Heartland Weekend Hedger Commentary
12/20/2020
Last Saturday’s Hedger newsletter ended with this. “Here is the bottom line, it is going to be very difficult for any of the grain commodities to move into a downtrend without a switch to a very rainy pattern in South America. The end-user side for demand continues to grow, and a US dollar that’s going to take on a very weak appearance into the new year has commodities set for further price appreciation. Technical breaks will be looked upon as opportunities to buy into and will likely be short-lived.”
Row crop futures turned up this past week as demand is already being witnessed in the bean crush from Tuesday and weekly export sales on Thursday. Add to that the La Niña effect in South America that continues to show evidence of building, kicked into beans on Tuesday. Soybean meal was the primary ignition for the rally, with substantial gains every day, boosting beans and pulling the corn market to the upside. New multi-year highs were made this week for beans, besting the high made in 2016 at 1208.4 in closing firmly above it.
The US dollar is under heavy pressure and closed the week out below 90.00, keeping the trend solidly to the downside, targeting 88.00. The Commodity Research Bureau Index, which is the tracking of all commodities combined, closed above 440, a level that could not be overcome since 2015. This technical event opens the door for widespread commodity buying, which is already being witnessed across the board. Even crude oil getting close to $50.00 this past week is part of this overall inflation buying without consumer demand increasing yet presently. There has become an awakening that commodities are still cheap compared to the overvalued stocking indices. With the world awash with liquidity, and a hope for a Covid-19 vaccinations in the new year, they return to cents of normality in 2020 is creating this excitement for broad-based inflation.
Cattle futures also performed this past week strongly despite a stalled and declining cash market in December. Here too, the future in 2021 looks brighter with numbers that fall off in the last half of next year. The prospects that restaurants will be reopening for some of the populace areas, and other areas of the country going back to full occupancy on vaccination enthusiasm.
The liquidity for money that was invented in one year alone for 2020 is mind-boggling. Between the Federal Reserve, the Cares Act, PPP loans, along with the current trillion-dollar package floating through Congress this weekend, we are taking our national debt from $20 trillion to 30 trillion in what seems like the wink of an eye over the past year. This in itself will be paid for with massive inflation since taxing and higher interest rates could never mop up that kind of liquidity fast enough. All you must do is study what happened after the Carter years going into the Reagan years and how interest rates exploded from 5% to 18%, to mop up a lousy $200 billion ($20 Bil from Congress, the rest from the Fed). You cannot fathom what it would take to mop up just the $10 trillion of the past year.
There is no way to ignore the conversation, but inflation will get ugly in the coming years. Yes, and agricultural prices will be better supported than what we’ve experienced since 2015 when the US dollar turned up, but your costs as the years come are going to get ahead of you. You can forward protect inputs for two years, but that takes money to buy that much forward. It’s 2023-2027 that will eat you up with your input costs much higher than that they will be today. It will almost be mandatory that you get a minimum of 3.70 cash corn, 9.50 cash beans to overcome the running inflation that will undoubtedly be a problem when normalcy returns, and the consumers spend.
This past paragraph seems like a nightmare story and heightened to make a point, but even if it’s wrong by half, it still tells you that inflation is coming, and this current lift in grain prices is just a start.
Obviously, there’s a reason why a large break never did develop from the November 30 high in soybeans, and the worst beans could do was break 5% of their value in three days and immediately returned into the uptrend slowly. Index funds are buying commodities, and for now, wheat is the struggler getting bought alongside row crops.
Back to the fundamentals in the grains driving the market, corn late in the week is now turning more bullish, as Argentine crop health worsens and forecasts maintain acute dryness into early 2021. What is starting to become apparent is that a severe drought will linger across Argentina and far Southern Brazil into February as a strong La Nina persists across the Equatorial Pacific. Recall significant Argentine crop loss is relatively standard in La Nina years. Already world corn demand is being shifted from Argentina to the US on a near-daily basis. An equally important issue is that seeding delays in South America will delay the arrival of their exportable surplus until mid-summer.
Wheat futures closed moderately lower on the week, saved by the strength in protein pricing of the corn and bean rally. The big disappointment over the Russian tax increases, as it starts no sooner than the quota on February 15. That means for 60 days (weather is very open for transport in Russia now do their drought), a large push of exportable crops can still occur, allowing Russia to top last year’s exports. Eastern Europe and Australia have stepped in on the rally meeting demand without reflecting the $0.76 US equivalent tax that was trying to be priced in. The catch in Russia is if the larger Russian farmers will act to move grain unless prices elevate? If not, this will leave the exporter scrambling to find product to sell before the quotas and taxes arrive on February 15. So, in the end, we should ultimately see a modest jump in US exportable wheat demand from non-traditional customers. For the time being, wheat will be the laggard of the grain pricing lift that is anticipated into the new year on export demand and South American weather concerns.
As stated earlier, the meal was the big push for the recovery this week since Tuesday’s crush report. The US soybean supply is being depleted at a record rate. At the same time, world end users fear that the already delayed S American crop may not be large enough to fulfill China’s February import need. Add to that a port strike in Argentina has caused their soybean meal/oil demand to be redirected to the US. The combination of the weak peso, new export taxes, and now the port strike is severely limiting Argentine soy/grain export volumes.
After this past Thursday’s weekly export sales data, US exporters have sold 90% of the USDA annual export forecast while cash crush margins are holding $1.30/Bu. The need for US soybean demand rationing is acute. Initial upside targets for soybeans are in the 12.60-12.90 range, but this is not likely to solve demand rationing problems. If the weather turns drier in southern Brazil-Argentina, as is consistent with El Niño events that get very strong, we could well be looking at $14.00 soybeans, with spot corn at $5.00. ($14.00 divided by the current ratio of 2.78=$5.03). By the way, I wouldn’t necessarily say $14 could be the highs for soybeans if a drought manifested severely in Argentina. Bull markets can become illogical (witness stock market, lumber, bitcoin) and overrun logical thinking. This is why we will be utilizing the short-dated new crop options for hedges in 2021 and use the sharp rally to finish up old crop sales in 5% increments on spiking moves.
Short-dated new crop options on an excellent new tool we have from the CME to do hedging early in the spring. If you watched the video from Thanksgiving weekend, I explained them in detail, and we will run that video again in the future. But in a nutshell, if we get sharp spikes that carry new crop beans to near $12 in February, along with new crop corn possibly near 460 (current new crop ration 2.58), we can go heavy on short-dated new crop options that get us well into the second quarter. The March 31 acreage report will likely show a massive increase in acreage for beans, and they’re still can be an increase in corn acres as PP acres come back online.
Since the US experienced a crop problem in 2019 with flooding and 2020 with the Midwest drought during August, it significantly increases chance for an above trendline yield production in 2021. We can roll new crop hedges forward or take delivery of in the money futures contracts when they expire if the market does a spike and drop, which is historically normal from a South American drought. Stay tuned because 2020 will be an exciting profitable year, but only if you do more than farming. You must do marketing as well.