Rest of the Story: Discounting Fundamentals—One More Time

Jerry Gulke's Rest of the Story ( Lori Hays/Farm Journal )

Now that soybeans completed a retracement of the 2018 gains back below the January low as of yesterday, perhaps I can quit discussing and chastising the media analysts for their irrational exuberance. However, in case you missed it or are one who did not decide to continue as a subscriber, here are some bullet points to discuss with your analyst/broker:

  • The danger of traders merely extrapolating the past history of demand increases for soybeans into future years, having missed so badly previous increases, created the “irrational exuberance” about Chinese demand. 
  • Some held the belief China’s demand for example would be over 100 MMT this year and perhaps 108 to 110 for the met marketing year 2018/19.  
  • Two weeks’ ago China’s National Grain & Oil Information Centre (CNGOIC) said in a weekly report that soybeans stocks have increased to a four-year high to 7.9 MMT, up 172,000 MT on the week and nearly 2 MMT higher than the year before, as poor crush margins and cheap hogs continue to swell the supply. 
  • Recently China began auctioning off stocks—yes stocks!
  • The chart below is worth a 1,000 words and tells the story better than I regarding the debacle that ensued and may have cost producers holding stocks of old crop or holding new crop waiting for China to be forced to buy. 
  •  The dollar drop in prices means a potential cost to US producers, and the benefits to family and business expenditure of potentially  $4 billion, yet not a word in the media about the indirect cost of not doing due-diligence.  
  • The price of July beans (old crop) has completely evaporated any idea of “China demand” as well as any weather premium that may lie ahead.  If demand is so super, there was really a poor showing again today on the USDA Report.  
  • The question now is what to do? Are these prices too cheap or did the June USDA crop report today merely offer a chance to sell before increased acres, a 52-bu. 2018 yield and disappointing outlook for 2018/19 make $10 in a lead contract (now July)  a figment of traders imagination? The market apparently doesn’t believe the 2018/19 carryout of 385 million bushels which is based still on 89 million acres and 48.5-bu. yield but includes an export projection of 2.290 billion bushels, 225 million bushels larger than 2017/18. 
  • Can any increase in acres and yield be absorbed through further increases in demand? NASS can now blame Mother Nature and the U.S. farmer for any further debacle in soybean prices, as can the media!

 

Soybean

CORN:   As I mentioned last week, up moves generally come in three moves higher. The July corn chart below shows the completion of a 1,2,3 move higher.  The failure of the next move higher above (3) happened two days before the massive daily key reversal down signaling that risk was to the downside. There is the danger/possibility of corn erasing the whole move back down to $3.63 when it all started in early January 2018 (July retraced to $3.66 ¾ before today’s bullish report). My aforementioned concern that many traders who came to the bullish trough late and started to predict 1.6-billion-bushel carryover did so near the top. It got crowded at the top ! 

Today, the USDA confirmed our long-standing, long-term friendly stance on corn with a carryover for 2018/19 of  1.577 billion bushels.  If the market wasn’t factoring in an extra 1 million acres and a yield of 178 to 180, today’s price for December futures should be up considerably more than 10¢ but the week isn’t over yet.  A 1.577 billion bushel carryover suggest an exciting 2019 year for US exports. Over the past days, it became obvious that anyone who bought corn since January likely had a margin call, so liquidation by funds was expected in corn as well as in soybeans.

The good news about July corn prices yesterday was that they were at levels that totally discounted all friendly news as well as discounted another record yield of some magnitude, providing a low risk opportunity ahead of today’s report. This was sufficient enough for me to take hedge profits. There is a time to pass off price risk (hedge) and a time to accept price risk (lift hedges). Think about it. For price to go much more than 10¢ lower based on Monday’s close, we’d make new lows for the crop year in an outlook that USDA admittedly looks good, subject to extremely good weather here on out and the farmer fooling us completely by planting way more than 88 million acres. It was time for corn to make a decision, and USDA helped today.  

 

Corn

Wheat (SRW/HRW) led the way today as weather in the Black Sea Region has global analysts lowering production while we see our crops in harm’s way, not to mention the premium wheat in the Northern Plains is subject to heat on the horizon. Wheat has been the dog of the bunch, but when it turns, it leaves no prisoners and becomes an accelerating market pricing itself as a food and no longer a feed grain, thus helping market psychology to believe in less global feed competition with corn.    

Thank you to those who elected to extend their free trial into another two months of fee-based recommendations as they might have benefited from advice the past 30 days. Even the free trial folks had an opportunity. I know full well that most who get info free, may do so for entertainment purposes, and makes for fodder in chat room, while those that have skin in the game will pay attention, but I hope this column spurs some thinking.  If you found yourself confused or 180 degrees out of whack, give us a call. Perhaps we can help. 

Jerry Gulke

info@GulkeGroup.com

480-285-4745 or  707-365-0601

 

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