Grains See More Volatility

June 18, 2021

Grains See More Volatility

Wheat markets were choppy this week, whipped around by extreme moves up and down in corn and soybeans and ever-changing weather forecasts. We are in the thick of the growing season for spring grains and oilseeds, and weather has already created stress on those crops. But spotty rains and politics are causing significant volatility. For the week, Kansas City was down 31 cents, Minneapolis up 8, Chicago down 18, corn down 29 and soybeans down 112.

The day-to-day weather forecasts seem to generally get temperatures right but have not been reliable for projecting precip. For the next 1-2 weeks, there is enough rain in the forecast for the western Midwest that traders are willing to exit longs. If those rains do not materialize, there will be little to hold prices back.

Soybeans also suffered from some outside issues as well, with rumors flying about a potential drop in bio-diesel blend requirement for some refineries. However unlikely that is, the market did not like the discussion and weakness in world veg-oil markets had bean oil plunging limit down two days in a row, pulling soybeans down with it.

The markets are also experiencing huge speculative interest from index and hedge funds buying commodities for inflation hedges. But when prices turn south in a big way like they did this week, computer trading tends to create a negative feedback loop with lower prices causing more selling and yet even lower prices until prices either hit limit or exhaust themselves. It looks like both happened on Thursday with corn down its 40-cent limit and soybeans seeing a record one-day decline on Thursday as the front month July settled $1.18/bushel lower. Friday, it gained 66 cents of that back. Good luck trading that kind of market.

The broader inflation trade is getting clobbered. With the FED acknowledging that inflation is stronger and moving faster than they expected and mentioning raising interest rates even 2 years from now sent a wave of hedge liquidation throughout the commodity space. The US dollar shot higher, precious metals got smoked, grains saw major long liquidation and even cattle got caught up in the waves of selling. We did see those markets correct somewhat by the end of the week, but there was significant damage to the charts.

Winter wheat harvest has been anything but easy. A slow start for hard red winter due to rain is turning into a scorcher as the combines move into Kansas. Early yields there are about as expected (much better than average) and test weights so far are also good. Soft red winter wheat has also had its challenges with too much early rain, but those problems haven’t gone away, and it is going to get worse as rains are forecast for the next several days in the southern Midwest. Quality concerns are rising, which is helping support Chicago over Kansas City.

For spring wheat, the northern plains and Canadian Prairies have struggled with intense drought and heat. Some rain events have move across much of that region recently, but the drought is still intact, and the heat quickly brings the stress back. Rains are forecast next week for the Dakotas, which kept Minneapolis in a trading range for much of this week. There too, if the rains do not happen, there is little to hold spring wheat back.

It is worth noting that spring wheat areas in Russia and Kazakhstan are also experiencing dryness. Russia does not export spring wheat, but a decline in production could pull winter wheat away from exportable supplies. Kazakhstan, however, does export spring wheat, so that could offer some support to the broader world spring wheat market.

While all fundamentals ultimately matter, it is weather that dominates price action this time of year – and particularly when we have the backdrop of a major demand led bull market and tightening supplies in the grain and oilseed space worldwide. If the rains come this weekend/next week, prices will likely decline further. If not, or if the weather returns to its hot and dry pattern, prices will take another major leg up.

My guess is both will happen. Near term, corn and wheat still have room on the downside to complete some chart formations, while soybeans have already completed their formation and have held at a major support level. The longer-range weather forecasts suggest a return to the hot and dry pattern for the northern plains and western Midwest for July, which would be enough to take the markets on the next leg up.

Louise Gartner,

Spectrum Commodities

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