Why you should prepare for the top in this grain market

The bull market run in corn and soybeans continues as both scored a fresh high this week.

Prompt (near month) corn futures have traded at the highest levels since July of 2019 and have rallied $1.28 ¼ off the summer low. Prompt soybean futures are trading at prices not seen since the summer of 2016 and have rallied $3.88 ½ off the low scored in April.

So, what’s next?

We look for the corn market to continue to find support on the tight carryout that is currently projected at 1.7 billion bu., putting the stocks-to-use ratio at 11.5%. Many, including our AgMarket.Net team, are projecting even tighter stocks due to the excellent export demand we have seen.

There has been an unprecedented 40% drop in ending stocks in the past three months due to export demand and reduced expectations for this year’s harvest.

Chinese sales drive depleted stocks

The latest USDA export estimate is 2,650 Million bu. and China’s buying spree is a significant component of the drop in endings stocks. China’s reported purchases are 10.94 MMT. With sales of 5.3 MMT to unknown buyers, it is likely the China commitments could easily fall in the 12.0-13.0 mm range. USDA’s projection is China’s total corn imports will top out 13.0 MMT.

We feel it’s more – that total China corn imports could exceed 25.0 MMT, with a bulk of this demand coming from U.S. sources as other corn exporting countries run short of exportable supply. Both Russia and Ukraine domestic feeders are asking their governments for corn export quotas to preserve domestic supplies.

Soybeans stocks have been tightening just like corn. They were cut by 100 MB in the November WASDE report, with the drop attributed to a cut in supply as demand was left unchanged.  With the demand we see, we feel it is just a matter of time before the balance sheet’s demand portion is revised up and the ending stocks lowered. This week’s weekly export report showed China at 1.060 MMT, bringing their commitment to date a record 28.6 MMT. China’s commit of 28.6 MMT, plus a possible 5.5-6.0 MMT of the 10.1 MMT that has been sold to an unknown buyer (that could be to China), would result in a total current commitment by China in the 34.0-34.5 MMT.

With South America dealing with dryness, we would not be surprised to see China buy at least 38 MMT of U.S. soybeans. Total U.S. soybean export sales to date are a record 1884.5 million bushels vs. 867 million bushels last year.

But, for how long?

The question every producer is asking us is how long will this bull run last? The truth is we don’t know, but we do know that it will end, as all bull runs do. We encourage producers to develop a game plan to be prepared for when the “top” is put in.

As we mentioned in last week’s blog, U.S. producers had experienced three years of financial pressure before this unexpected run, which stopped the bleeding; now many producers are in a position to lock in profit margins for this year as well as the 2021/22 crop.

We feel it is essential, when developing this marketing plan, to keep your upside open with options. With the ending stocks-to use-ratios already at historically tight levels, any excess China corn and soybean purchases could tighten the balance sheets to record tight ratios. Using options versus sales moves you away from a gamble or 100% risk/reward in the marketplace, to a stable revenue curve if prices go down; but if prices go up your options will offset your sale and allow you to sell those same bushels at a higher price.