October 26 – Market Commentary

The Week in Three Numbers

$1.06 - The loss the corn market has seen since it's peak on September 2.

2.08% - The spread between the current export pace and the pace needed to hit the USDA's October WASDE export projections, a 91% increase from last week's difference.

297,707 - The number of long positions the managed funds have sold since mid-September.

The Market

Another week, another brutal week for row crops as we saw a lot of new bold numbers come onto the board.

Corn set a new bold red number as it continues its slide from the highs at the beginning of September. More here in a bit. Soybeans dropped four cents while the previous 52-week-low rolled out of range giving way to a new, higher number at $10.55. Wheat saw a similar situation, with a new, higher 52-week-low at $5.64 while also setting a new bold red for the third straight week. Live and Feeder Cattle both had good weeks, setting new bold greens as we head into the last week of the October trading month. We saw new bold red numbers in Crude and Diesel for the second consecutive weeks. Crude, RBOB, and Diesel will all three will have new bold greens next week as the old rolls off the board this week. On the treasury side, the S&P 500 gets a new bold red as the old one falls off the board. This new floor is almost 200 points higher than the previous low. The Dollar Index traded near even on the week but got a new 52-week-high as the old one rolled away.

The bears continued to forage through corn last week, having lost another 18 cents. Corn's now trading at the lowest point since July 10, having lost $1.06 since the peak on September 2. July is where we find some support on the chart just under $4.50. If we fall through that floor, we could be looking at the lowest December price of the calendar year.

It's worth checking out the January WASDE report just as a comparison.

January's WASDE was the one that took the market by surprise, increasing the total amount of harvested acres, which brought up supply by quite a lot. That report saw the market lose 14 cents almost immediately and closed at $4.51 before losing another five cents the rest of the week. Looking at the two balance sheets, there are some similarities. The October report has a better stocks-to-use ratio, with lower demand and higher supply. This balance sheet comparison doesn't necessarily justify returning to January's price levels on fundamentals alone. But if demand expectations weaken, or supply estimates increase again, the gap between those two balance sheets will likely close.

Unfortunately, exports are doing their part to help bring us down. The USDA's Export Sales Report showed a pretty healthy run of new sales at 1.527 MMT, 36% higher than the previous week and 87% higher than the prior 4-week average. It's important to distinguish between sales and actual exports. The USDA' s export forecast is the number of bushels that need to be shipped off our shores. Sales are just that, agreed upon contracts of grain to be shipped later. While sales are a good indicator of export demand to come, they're not guaranteed, as sales can be removed from the books.

However, exports of only 780 TMT, down 43% on the week and 51% from the four-week average caused the spread between the current pace and the pace needed to hit the USDA's export projections to widen. We're now looking at a two-percentage point difference, nearly doubling from last week. It's likely still too early for the USDA to make any drastic changes, but it's not a great sign. Should the USDA lower export projections in the November report, there's a chance that stocks-to-use ratio gets closer to that January report.

I'm not the only one noticing it either - the trading bulls liquidated more positions. The CFTC's Commitment of Traders report showed managed money cutting over 80,000 more net long positions while adding almost 70,000 short positions. Almost 200,000 long positions have been lost since the end of October, while the shorts have doubled. As these long positions are liquidated, it just adds additional forage for the bears to munch on.

On the bright side, ethanol production was up for the fourth week in a row, hitting the highest production levels since mid-September. Meanwhile, the USDA's Cattle on Feed saw an uptick in the cattle herd both nationally, with an increase of over 200,000, and in Kansas, with an increase of 60,000.

We can't get through this without discussing soybeans. Soybeans closed last week down four, but news over the weekend caused another downward shift in the market that may take some time to correct. Lula da Silva was reelected as Brazil's president over the weekend, surprising the market and sending the Brazilian real down almost 10% against the dollar. The weaker currency makes Brazilian soybeans cheaper relative to American soybeans, which could have a real impact on sales and exports. Downward pressure in the soybean market could have a bleed over effect on the corn market this week as well.

This is where the strength of the Dollar Index really starts coming into play. The U.S. Dollar Index measures the dollar's value against a basket of six other currencies. Investors and traders use the USDX to understand economic health factors such as the dollar's relative strength, how that might affect prices for goods and services, import and export demand and the state of the economy.

Even coming off the high at over 102, we're still sitting at the strongest Dollar Index of the year. And going back further, it's the highest since May of last year. When the dollar's strength increases, it makes imports less expensive and exports more expensive. While the Brazilian real is not part of the DXY basket of currencies, DXY is an indication of the general strength of the dollar.

This two-year real-dollar spread chart shows the downward trend in the Brazilian reals value.

The dip from the presidential election sent the spread to its lowest point since May of this year, right as we're hitting our highest stock levels. The spread combined with rumors of a bumper crop in Brazil lead to some skepticism in the soybean market.

So, unfortunately, until there's a change in the fundamentals, we're looking at a hungry bear market with plenty of information to feed on.

The Week Ahead

It's a slow week in the USDA report world. But next week is the general election, and there's always a chance for elections to swing markets. So, get out and vote early, or plan to get it done next week!

Stay safe out there.