Todd's Take

A Sense of Grains' Impending Doom

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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This chart shows DTN's National Corn Index near-vertical climb since August 2020. Is the end of this bull market near, or are we protecting ourselves from past disappointments? (DTN ProphetX chart by Todd Hultman)

While cash corn and soybean prices trade back from their highest levels in eight years, I couldn't help but notice a conspicuous lack of celebrating this week among the growers of grain. Maybe there were some restrained high-fives and Snoopy dances behind closed doors -- and I can only imagine how many "Thank you, Lord!" sighs floated upward.

But for the most part, I get the sense that many are breathing with one lung and holding their breath with the other, waiting for the bottom to drop out. Tuesday morning, I tweeted out news of a third sale of new-crop corn to China and the first reply came back, "Rally's over ... ."

A day earlier, a Twitter acquaintance sent a cartoon image of a guy pressing an elevator button, causing the elevator to plummet hopelessly down the shaft. To be fair, I'm not sure which market he was referring to -- maybe all of them. I have to admit, I suspect many have the same sense of impending doom that this bull rally in grains is going to find a way to go bad.

Any good economics professor would explain that these big profit margins for growing grains are not sustainable in the long run, as the high prices will encourage more production and give users of grain incentive to find ways to buy less.

But for anyone that has farmed or worked around grain markets for more than a few years, you don't need an economics professor to become distrustful of high prices. Several decades of grain market experience is better training than anything Pavlov's dogs ever got. Optimism about grain prices is a bullish flame that has burned many hands more than once.

Even at something as innocent as a Mother's Day gathering, I was asked, "Do you think $7 corn is a good thing?" My first response was, yes -- for anyone that still has corn. The second thought was of many farmers over the years that told me that they thought $8 corn was the worst thing that ever happened to them and their neighbors.

On one hand, I feel proud that so many are staying skeptical and not letting the bull market turn their brains into a euphoric mush. There are good reasons to be cautious and take advantage of the higher price opportunities offered.

On the other hand, at the risk of sounding like a sucker, this particular bull market has more staying power than most, and I'm not seeing the end of the rainbow yet. I'll cringe and say the words history often proves wrong: This time is different.

The surge of cash corn and soybeans prices we have seen since early April has been breathtaking. I don't recall cash corn bids of $7 and higher or soybean bids of $16 and higher ever blanketing the Midwest the way they did earlier this week. A bushel of corn at $7.71 in Aberdeen, South Dakota? Forget about it.

I can't say I expect prices to go higher, but I don't see them falling down an elevator shaft either. The bull market of the 1970s was largely about currency devaluation with a mix of weather. The grain bull market that started in the fall of 2006 was largely the result of increased global demand for tight crude oil supplies. The need for oil led to U.S. ethanol mandates, which lifted grain prices, also spiced with bouts of adverse weather.

This time around, the bullish thrust is coming from the emergence of China as an economic force. China has long been the world's largest buyer of soybeans, choosing to prefer corn production at home. For years, we operated under the assumption that China had plenty of corn. Regarding corn, China was easy to ignore as it didn't import or export much.

That changed in 2020-21.

Officially, China has purchased 891 million bushels of corn from the U.S., a lot of it for less than $4 per bushel. Little did we in the West know how quickly China's corn surplus was disappearing and how fast demand was increasing. Even in the U.S., there is a good chance U.S. corn supplies are tighter than the 1.26 billion bushels (bb) that USDA estimates, thanks largely to China's demand.

As USDA still contends that China will have 198.16 million metric tons (mmt) or 7.8 bb of imaginary corn surplus in 2021-22, it is more interesting that USDA estimates China's corn production will fall short of use by 26.0 mmt or 1.02 bb, the same amount USDA expects China to import.

My level of confidence for any estimates pertaining to China is no higher than it was a year ago, but seeing July corn trade near $11 per bushel on China's Dalian exchange adds weight to the view that China is not able to supply its own needs. For that reason, I continue to expect some form of this bull market in corn and soybeans to last longer than just one season.

Weather will play a big part in 2021, and we have early concerns about dry conditions in Northern growing areas. There are plenty of reasons to expect a volatile price ride this summer, so, once again, I'll say it's time to buckle up.

I don't want to take away anyone's cautious instincts about this bull market, but I also don't want producers to shut themselves off to the possibility of prices staying high just because we've been burned many times before. For U.S. corn and soybean producers, as long as outside markets don't get in the way, 2021 should be a good year.

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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

Todd Hultman