Todd's Take

As Goes September

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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In the past 21 years, March corn has traded higher in the month of September only eight times. In six of the eight, March corn closed higher in the October-December quarter with an average gain of 21% versus the two losing quarters with an average loss of 7%. (Source: DTN Analyst Todd Hultman)

Just one day ahead of USDA's next round of row-crop estimates, it is no secret by now that the U.S. has had another good growing year and this fall's harvest is expected to be big -- record big.

Dow Jones' survey of analysts expects Wednesday's report to peg the 2016 corn crop at a new high of 15.04 billion bushels. The soybean crop is expected to total 4.28 billion bushels, but could be more given the recent scuttlebutt on yields.

Record crops at harvest time are bearish on prices as anyone would expect, but we should also not forget that USDA is estimating record high demand for both corn and soybeans in 2016-17. In September, USDA estimated U.S. corn demand at 14.47 billion bushels and soybean demand at 4.06 billion bushels. Let me point out once again that USDA has underestimated soybean demand in 21 of the past 26 years, so USDA's demand estimate has a tendency to grow as the season progresses.

What's more, corn and soybean exports are off to a red-hot start in 2016-17. Last year, if you recall, Brazil was winning the export game with a cheap currency and plenty of grain to sell. This year however, Brazil's shelves are empty and U.S. corn and soybean prices are attracting the lion's share of the world's business.

One month into the new season, total sales and shipments of U.S. corn and soybeans are up 87% and 30%, respectively, from a year ago and it will be months before Brazil will have grain to sell again. It would not be surprising to see USDA's record demand estimates increase a little more as the season plays out.

Now well into harvest, corn and soybeans are near their lowest prices in seven years, but with demand doing better this fall, it does not seem likely that prices have much downside risk this winter from current levels. In fact, an interesting clue emerged last month which should not be overlooked.

Traditionally, September is a horrible month for owning either corn or soybeans as futures prices of both closed lower in 13 of the past 21 years. The bearish tendency makes sense as this is the time of year when prior worries of possible crop threats give way to the reality of the impending harvest. Especially in years such as 2016 when crops are large, September tends to be the month when bullish hopes deflate.

This September however, December corn closed up 21 1/4 cents and January soybeans closed up 13 1/4 cents. Since higher closes in September don't happen very often, I thought it would be interesting to see what typically happens to prices in the remaining three months of the year after September gains are posted.

As suspected, contra-seasonal rallies in September have been bullish clues for row-crop prices. Out of the eight years since 1995 that December corn and January soybean prices closed higher in September, both went on to close even higher three months later an impressive six times.

For December corn, the six gains from October through December averaged 21% while the two losses averaged 7% each. The six gains in January soybeans averaged nearly 13% each while the two losses averaged 5%. In both frequency and amplitude, we can say for corn and soybeans that as goes September, so goes the rest of the year.

As usual, I cannot guarantee corn and soybean prices will finish out 2016 higher, but given the improved demand that we are seeing this year, this year's bullish September clue does seem plausible, especially for corn. For soybeans, there is still concern that Wednesday's WASDE report may be holding a bearish surprise.

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

Follow him on Twitter @ToddHultman1

(CZ/SK)

Todd Hultman