Prices on the December corn and November soybean contracts have consolidated considerably over the past 6 weeks. For reference – in the month of July, December corn had a trading range of 91 ¼ cents. In August, that trading range shrunk to just 45 cents, and thus far in September, we’ve bounced around in a 15 cent trading range. The same degree of consolidation was not necessarily observed in the November soybean contract. Nonetheless, the November soybean contract was unable to stage a rally over the last two weeks after recording flash sales in 6 straight sessions, and having Good-to-Excellent ratings (G/E) slashed a whopping 5% in just a week this past Tuesday. How could that be? As it currently stands, volatility in the grain complex is at a one month low. Could this be the quiet before the storm? Historically speaking, prolonged consolidation in commodity markets (especially agricultural commodities) typically results in sharp breakouts. Next Friday’s USDA WASDE report could be the catalyst for the breakout.
Historical Price Relationships – Soybean:Corn Price Ratio
Sometimes the best way to try and predict the future is to look at the past. Last week, the bean:corn price ratio jumped to 7 year highs at 2.86. Historically, it’s very rare that the ratio goes beyond 3.00. This was likely a contributing factor to the November soybean contract failing to stage a significant rally amidst a slew of bullish headlines, and the reason why price ranges in the December corn contract continue to tighten.
The chart above shows the recent extremities in the bean:corn ratio over the last 15 years. The years included are 2023, 2016, 2013 & 2012. Early in the summer, there was much made about the similarity in price action between this current year and the ‘12/’13 crop year. Unfortunately, as we’ve approached harvest, the sentiment has turned closer to the ‘13/’14 crop year. That is a bitter pill to swallow considering the average farm prices received over the previous two crop years for both corn and soybeans. That said, correlation does not equate to causation. No two years are exactly the same. So, there is certainly still potential for higher moves to come in both the December corn and November soybean contracts.
There’s no beating around the bush – the fundamental situation for corn was bleak at the beginning of the crop year. Production and planted acreage were much higher than expected, and demand for American corn was substantially lower as a result of lower aggregate Chinese consumption and a very strong U.S. dollar. As of now, cumulative exports are still down approximately 32% year-over-year. But, USDA clearly overestimated yields, and we’ve seen a notable pickup in flash-sales and export activity over the last 4-5 weeks – especially from Mexico. So, there is still a window of opportunity. From a marketing and risk management perspective, the adage, “Prepare for the worst, but hope for the best” fits like a glove. We will cover the upside and downside potential for December corn later in the article.
Part of the aforementioned bullish case for corn comes from the strong fundamental performance of the soybean complex over the course of the last 5 weeks. That’s been exacerbated by the flurry of bullish headlines over the past 2 weeks. Specifically, beginning on Monday, August 29th, we started a chain of 6 consecutive flash sales between China and “Unknown Destinations” totalling 1,138.1k Metric Tons (41,818,003 bushels). Then, after the Labor Day weekend, G/E ratings were cut 5% to just 53% G/E on Tuesday. Effectively – the USDA admitted that our bean crop may lose its right leg, with the caveat that it may only be up to the knee. Following the ProFarmer Crop Tour, and the heatwave endured amidst it, many were disappointed when G/E ratings only fell 1% (now) 3-weeks ago, to just 59% G/E. That skepticism fueled downside price action with managed funds liquidating a portion of their net-long position without re-entering new positions – effectively leaving the market.
September WASDE – What To Watch For & How To React:
Domestic yields for both corn and soybeans should be closely monitored in Friday’s report. As previously mentioned, the USDA began the crop year expecting corn yields to average 181.5 BPA. As it stands, market pundits’ most optimistic forecast for Friday’s report are just 175 BPA. The table below shows the average yield and production estimates for domestic corn and soybean production.
Aside from domestic production and yields, Brazilian crop estimates and foreign demand estimations will be well-worth monitoring. Corn production and yields likely take the center stage, as they have been the laggard relative to soybeans. Moreover, the rally in WTI crude should not be ignored. While unlikely the USDA makes an adjustment to their domestic corn usage for ethanol estimations this month, a surprise upside adjustment would be noteworthy. However, a sub-50 BPA yield estimation for soybeans may also serve as a springboard for grain prices. The charts below show potential upside breakout prices worth monitoring, and downside targets that could be utilized as a risk management tool for producers.
Unsurprisingly, an upside breakout in the December corn contract requires a retest, and close above 500. In the month of August, the contract tested, and subsequently failed to close above 500 on 8 separate occasions. A close above 502-6 may signify that we have indeed broken out to the upside. However, a close below 477-0 opens the door to retest the recent contract lows, and ultimately move lower.
The November soybean contract actually tested trendline support in the overnight session on Friday, but managed to close higher, which is encouraging. If we experience an upside breakout in corn, it should bring residual strength to soybeans. Moreover, soybeans could provide the strength in their own situation with a low side surprise on yields, and a continuation in materialized demand next week ahead of the report. A close above 1398-2 after Friday’s report would both fill the small gap from August 29th, but could also signify a breakout to retest the most recent contract highs. On the other hand, a breach of trendline support, and a close below 1366 after Friday’s report opens the door to lower prices.