The Bull Market Rages On

April 30, 2021

The Bull Market Rages On

I haven’t written a wheat article in a few weeks, focusing more on my podcasts. But the recent run-up in the grains has prompted numerous questions and I thought I’d attempt to answer them in this article.

The grain complex has been in a demand-led bull market since last fall, driven by massive feed grain demand, primarily from China, as they rebuild their hog herd by moving to large-scale commercial production and restricting what smaller farmers can feed their hogs.

A smaller than expected US corn harvest last year added fuel to the fire, and the race was on in South America to plant fencerow to fencerow. And they did. But weather issues shaved off production potential in Brazil and Argentina, adding yet more fuel the unrelenting bull market.

Brazil’s second season corn crop was planted late because their soybeans were planted late and then ran into harvest delays. That pushed the winter corn growing season later into the normally dry period. That crop is now entering pollination already under drought stress with no relief in sight. With most of Brazil’s corn exports coming from this second season crop, world buyers are scrambling to secure summer needs elsewhere, and that means primarily the US and to a much lesser extent, Ukraine.

China made the switch early and aggressively, booking huge amounts of US old crop corn for summer delivery. That is a problem, given our short crop last summer. Commercials have watched cash march steadily higher, led by huge basis bids on top of soaring futures prices. Cash corn prices are than double what they were just 9 months ago. There isn’t enough old crop corn to go around, and export commitments to China are making commercials very nervous. China isn’t showing any willingness to push sales to new crop, and if they demand delivery this summer, price action could get really crazy.

We expect prices to move steadily higher in demand driven bull markets, but this is eye-popping. Commercials getting out of short positions are driving prices higher as we head into the May delivery period, not speculators. This tells us the move is not over yet. We may get a correction, but the longer-term uptrend will remain solid until at least feed grain stocks are increasing. Given the expected planted acres for corn and soybeans that is unlikely to happen this year, suggesting the bull market could last into the next South American season, and likely 2022 for the Northern Hemisphere as well.

For wheat, specifically, obviously it will go higher as corn moves higher. Around the world, wheat is the most common animal feed, but we are starting to see it here in the US as well, and basis bids have strengthened particularly for hard red winter in the heavy cattle feeding areas of the southern/central plains. While old crop supplies are becoming tight, new crop potential is deteriorating. A heavy freeze two weeks ago did what appears to be extensive damage to headed out wheat in the southern plains. in the northern plains, drought conditions since last fall have lingered and are threatening new crop prospects for crops and cattle in MT, ND, SD and MN and stretching into IA.

First Notice Day initially offered some relief to the grain complex, but by the end of today’s trading session, front-month May futures for both corn and soybeans had soared again, with the delivery May contract more than limit up (since it has not limit) and July corn closing limit up. Clearly, price has not move up enough to ration demand so there is likely more panic coming. The wheat complex saw spreads make big moves with Minneapolis sharply higher against Chicago. Longer range weather forecasts show little chance for rain in the north and spring wheat prospects are declining quickly.

The rest of the northern Hemisphere’s wheat crop is off to a decent start. We did see some winterkill in Russia that will force some abandonment of winter wheat acres. Production prospects are down from last year’s record even though wheat plantings are record large. A dry start to Europe has turned moist. Most of Ukraine and Romania look great and production estimates are rising. So, the wheat market isn’t as clear cut as corn, but surging corn values will certainly support wheat prices.

Price action for the grain complex appeared to have spiked with a blow-off top just a few days ago, but with today’s price action, corn is clearly telling us the party isn’t over just yet.

Wheat tends to rally into the May supply/demand report. This year we will likely see that kind of action. The market is on high alert to weather issues, and declining crop conditions in winter and spring wheat are building the weather premiums.  Perhaps we will just test the recent highs into the crop report and call it a good at a double top.

My guess is that we will get a more sustained correction once the crop report is behind us, considering the US planting season is going well. I think spring wheat will continue to gain against the winter wheats as harvest pressure will make rallies difficult for hard red and soft red winter wheat.

Bottom line: demand is still torrid, current supplies are very tight; and new crop supplies are expected to only be barely enough to satisfy current demand. There is NO room for production losses. Any hint of weather issues in the US Midwest and grains explode higher. The bull market is alive and well until we rebuild stocks especially for corn and soybeans, but wheat as well, and that is unlikely to happen with this year’s crop.

Louise Gartner,

Spectrum Commodities

Listen to my podcast on wheat and cattle:

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