Todd's Take

A Brutal Week for Grains

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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Thursday's close in December soybean meal saw prices fall to a new low for 2018, a bearish technical break for noncommercials, last seen holding over 100,000 contracts net long (DTN ProphetX chart).

To say this has been a bearish week for grain prices is a bit of an understatement, with December corn down 17 3/4 cents, November soybeans down 38 3/4 cents and December Chicago wheat down 38 cents -- all as of Thursday's closes. Some of those losses could be trimmed on Friday, but let's face it, the market environment for grains is not very friendly at the moment.

As a grain analyst that has done the math on the historical seasonal tendencies for corn and soybeans, it seems I can never warn enough about the dangers of owning corn after early June or soybeans after early July. And yet here we are again, looking down the barrels of two big crops, getting closer to harvest, and scaring off the buy side of the market.

The unpredictability of weather at the start of each growing season is what keeps traders up at night and fuels perennial bullish hope for crop prices. Once again, it appears that Mother Nature has being mostly kind to U.S. crops in 2018, the sixth year in a row that big fall harvests are expected.

You may know by now, I am not typically a fan of noncommercial trading behavior, but I have to admit that in the case of soybeans, noncommercials were lightly bearish on Aug. 14, well-positioned ahead of this week's lower prices.

The same can't be said, however, for corn or winter wheat where noncommercials were net long before this week. In the case of Chicago wheat, the situation looks increasingly bearish from a technical point of view as the weekly stochastic is now turning lower after noncommercials had been holding their largest net-long positions on record -- a dangerous combination for winter wheat prices.

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The one bullish factor in corn and wheat's favor is that USDA is expecting lower ending world supplies of both by the end of 2018-19. That doesn't offer prices much help in the near-term, but it does offer more bullish hope for both prices in early 2019 when demand tends to get more attention.

As tough as prices have been this week on corn, soybeans and wheat, the most bearish event on Thursday came from the contract that previously had the most bullish hope -- soybean meal.

Ever since Argentina, the world's largest exporter of soybean meal, suffered drought in early 2018, buyers of all sorts scrambled into soybean meal, sending the spot price briefly above $400/short ton (ston) by late April. Noncommercial net longs increased to record levels, also peaking in late April at 167,456 contracts.

When U.S. crop weather looked good in early June and concerns about trade with China increased, December soybean meal prices fell lower along with corn and soybeans, but unlike corn and soybeans, never dropped below the 2018 low of $318.40 -- a modest bullish victory for meal prices.

Another bullish factor was how the December contract continued to maintain a premium over March, even after prices dropped in June and early July. What was not so bullish for meal was how slow noncommercials were to liquidate their longs. December prices dropped from $400/ston to less than $340/ston, but CFTC data showed noncommercials still holding over 100,000 net longs on Aug. 14.

By Thursday's close, the bullish hope for December soybean meal crumbled when prices fell $6.70 to a new 2018 low of $316.50/ston -- a move that puts new pressure on noncommercials to liquidate their large net-long positions. It is also not good timing that soybean prices are already facing the anticipation of a record soybean harvest.

For corn and soybeans, seasonal lows typically arrive around early October, and in the case of corn, an earlier harvest in 2018 may lead to an earlier seasonal low. For U.S. producers, the way grains traded this week, those lows can't come soon enough.

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

Follow him on Twitter @ToddHultman

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Todd Hultman