Todd's Take

Typically, when a new crop season in corn or soybeans starts with lower beginning stocks than usual, it is because the previous season had a drought, and it is a matter of time before the new season comes roaring back with increased production and a restoration of previous surpluses. In the new seasons for corn and soybeans, about to begin on Sept. 1, the situation is much different.

There was some drought loss late in 2020, but the 14.18 billion bushels (bb) of corn and 4.13 bb of soybeans harvested were not disastrous crops overall. Export increases of nearly 1 bb of corn and 581 million bushels (mb) of soybeans were the larger part of the story in 2020-21, explaining why ending stocks of U.S. corn and soybeans fell to their lowest levels in eight years.

Here in mid-August, even as the northwestern Corn Belt contends with chronic drought, the U.S. is expecting modestly larger corn and soybean crops in 2021, but not enough to restore surpluses close to levels prior to 2020-21. In the case of U.S. soybeans, there is a good chance this year's production won't be enough to match demand in the new season.

Having lower-than-normal corn and soybean supplies for a second consecutive season is an abnormal predicament, and the market acts confused as to how to move forward.

In normal years, we would expect both corn and soybean prices to slide lower in July and August, gradually reaching their harvest low in early October. The bigger the crops expected, the more prices would typically fall and the later the harvest low might come.

However, this year, we have two conflicting forces at work. On the bullish side, this year's corn and soybean crops are both limited by lower-than-expected plantings and drought in the northwestern Midwest. The remaining wildcard is China's demand, and that is where the bearish possibility comes in.

As far as we can currently tell, China's need to import corn and soybeans should be close to the same levels experienced in 2020-21. USDA is estimating another wide gap between China's corn production (268.0 million metric tons or 10.55 bb) and consumption (294.0 mmt or 11.57 bb). The difference is similar to 2020-21 when China unexpectedly bought 900 mb of corn from the U.S. September corn on China's Dalian Exchange closed at the equivalent of $10.09 Thursday, Aug. 19, a strong hint that more corn imports are needed.

For soybeans, USDA estimates China's production will fall short of consumption by 98.7 mmt or 3.63 bb in 2021-22. That is up from a production deficit of 92.9 mmt or 3.41 bb in 2020-21. September soybeans on China's Dalian exchange are also expensive, trading at the equivalent of $18.52 per bushel. Even after importing large amounts of soybeans from Brazil, China's appetite shows no sign of being satisfied. The world's largest buyer of soybeans has been an active participant in the current 11-day streak of U.S. new-crop soybean sales announcements.

Aug. 19's widespread commodity selling and 33 1/4-cent drop in November soybeans reminded us that the resurgence of coronavirus remains a serious concern. As DTN Ag Policy Editor Chris Clayton wrote about on Aug. 18, U.S. demand for Asian imports has made it difficult for U.S. exporters to get shipping containers and has led to a traffic jam of ships waiting to get into Southern California ports. (See https://www.dtnpf.com/….)

Meanwhile, the spread of the delta variant throughout Southeastern Asia and across Chinese cities has led to travel restrictions and the closing of important ports in China. It is not clear how long the port closures will last. During the initial pandemic in 2020, there were numerous difficulties, but grain largely reached its destinations.

Given the high stakes involved in international trade and the lack of transparent information out of China, it is natural to wonder if the government is trying to take advantage of the reignited pandemic to help scare down corn and soybean prices.

I have no doubt that the spread of the delta variant throughout China is legitimate, and I understand their no-tolerance policy of locking down large population segments worked well for them in 2020. However, there is always a lingering suspicion that temporary port closures may have more than one purpose, also making it easier to secure the large amounts of corn and soybeans they need at cheaper prices.

Of course, I have no evidence for the suspicions above but mention them to point out that corn and soybean prices are subject to all sorts of risks, which aren't always explained by traditional notions of supply and demand. Given the risk, it may not be a bad idea to consider an inexpensive March corn put or soybean put as affordable forms of price insurance for unsold production.

Technically, December corn at $5.50 3/4 on Thursday's (Aug. 19) close is still within its triangle formation, holding support above the recent low at $5.32 and not yet surrendering to rain in the forecast. November soybeans, however, broke lower out of their summer triangle formation and closed at $13.20 Thursday, threatening to trigger noncommercial selling.

It's ironic that these doubts about demand are happening at a time when traders are focused on guessing the size of this year's crops. We tend to do the things we're most comfortable with, and right now, sticking to seasonal rituals is where the market's attention seems to be.

For the second year in a row, demand will likely be the primary deciding factor for prices and currently has the most uncertainty. I still suspect China needs to import large amounts of corn and soybeans, close to what USDA estimated in the August WASDE report. However, encountering round two of this global pandemic makes those estimates a little less certain.

**

Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman1

(c) Copyright 2021 DTN, LLC. All rights reserved.