Mid Week Comments
Still Falling - 06/22/21
Last week our Tuesday market column title was "Down the cliff!", which
was extremely precise forecasting as grains did just that on Thursday,
with $1.20 losses in soybeans (the biggest daily loss ever), and huge
losses in other grains as well. We have been saying for weeks that the
market seemed intent on dropping even when there was no news -
essentially taking the bubble out of the grain prices we added last
winter and early spring. In one day last Thursday, we erased 3-4 months
of soy price gains in just one day. Now, one could argue the premium we
had in grains to start the 2021 year was almost gone.
While the big prices are gone, the growing 2021 crop that had such a
great start (early planting into good moisture) has slowly deteriorated
the past 3 weeks or so, with HRS wheat nosediving in crop ratings the
most. Corn and soybeans also are suffering nationally, with 3-4 bu/acre
decline in corn the past few weeks, and 1 bu/acre decline in soybeans.
Essentially, that means we've gone from an above average crop in
corn/soys to below average in just a few weeks - the same weeks prices
have dropped sharply. 2 bu/acre losses in corn per week mean 180 mb of
lost production with only 1.1 billion carryout projected. A 1 bu/acre
losses in soybeans is 90 mb with only 150 mb carryout. So while prices
are dropping, the risk of shortages in the 2021 crop year are rising.
The western corn belt has the greatest risk - ND, SD, MN, CO, and NE.
These states have little moisture going into a time of year (July/August)
when we typically use stored soil moisture - moisture not present in
Weather forecasts continue to suggest cool/wet weather for the
eastern/southern 2/3 of the corn belt, but warm/dry for the
western/northern 1/3 of the corn belt. Today, the remaining rain system
across the US is leaving the eastern seaboard, with no real organized
system coming through the corn belt like we typically do every 3 days in
summer. That leaves a void in rainfall; however, the forecast is for
improved rain changes in the central and eastern corn belt - enough to
keep yield potential high. But the parched western/northern corn belt
will see further deterioration in crop yield potential.
Crop conditions out yesterday 6/21 really emphasize the point that
southern areas are doing great (improvements in winter wheat (+1%),
cotton (+7%), peanuts (+4%)conditions) and declines in corn (-3%),
soybeans (-2%), oats (-3%), barley (-6%), and especially HRS wheat (-10%)
conditions. Soil moisture levels also rapidly deteriorated last week,
with subsoil -4% adequate/surplus and topsoil -7% (very large losses).
These are quite large declines in soil moisture as well as HRS wheat,
barley, and corn condition ratings in one week.
The Pro Ag yield models declined 0.62 bu/acre in corn (another 50 mb
lost), and in the first full data soy yield model indicates a 48.6
bu/acre yield potential - 1.2 bu/acre below 'trend' so that's 108 mb less
production potential. When subtracted from our anemic carryout levels,
that leaves almost no ending stocks so this is a critical time for the
crop. We had better get the rains forecast the next 2 weeks, or this
crop will be in a dire condition. Markets are spiking lower this morning
after a stronger opening, but the proof will be in whether we actually
change our dry/warm weather pattern, or just continue to not get rains
that are forecast to fall.
The market is at a bit of a crossroads; will we get the rain to revive
the yield potential of the 2021 crop? Or will we continue to decline in
yield potential - just like our soil moisture situation is suggesting is
likely to happen when the crop water needs surpass the normal precip that
falls (not much stored soil moisture in western areas). There just
simply is no stored soil moisture left in western/northern areas, so
yield losses will be determined solely by the rainfall that falls vs. the
crop demands. And typically in the west, normal rainfall does not equal
crop needs during July and August. So without excessive rainfall (above
normal), further deterioration is likely.
To be quite honest, if the crop continues to deteriorate, rains continue
elusive, and prices keep dropping Pro Ag will be recommending buying call
options to protect our considerably profitable and substantial sales for
the 2020, 2021, '22, '23, and '24 crop marketing years. Because when
things were too good to be true and prices were overheated, we were
aggressive sellers. And now that prices have dropped considerably and
crops have deteriorated, it would be silly not to at least buy some call
option protection at cheap cost to protect these great sales. After all,
that's what risk management is all about.
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