Market Commentary from Kottke Commodities – Commodity Capital CTA – Kenneth Stein
July is the make-or-break month for U.S. corn, as well as immediately ahead of the counterpart period for soybeans. After burgeoning world demand stripped the big South American soybean crop bare in only five months, and Brazil’s corn production shrank, the consequences of a merely modest problem in the U.S. harvest would have been extremely serious. Widespread publicity of “La Nina,” an unusual eastward shift of warm water in the Pacific Ocean associated with poor growing conditions inNorth America, had the world food market particularly on edge. Prices of both corn and soybeans rose sharply in June in apprehension of widely-forecast hot and dry weather during the crucial months to come.
Feared conditions did not materialize, as 85% of the area planted to corn and soybeans received near- or above-normal rain during July, and above-normal temperatures did not linger. While actual crop size won’t be known until combining in September and October, the risk of big problems has largely passed. It must also be emphasized that no more dramatic example of the importance of bioengineered hybrid seeds, which engender drought and disease resistance, could be imagined than the highly successful results of this year’s sorely needed grain harvests around the world.
For those many commentators who attributed the nearly $3/bushel, 30% rise in soybeans from March to June to “money flow” or some such nefarious distortion, the unprecedented tidal wave of export demand now hitting U.S. ports should serve as a sobering lesson of what was actually going on. Had either weather or modern seed technology failed to produce extremely high yields, a very serious food crisis and far higher prices would clearly have occurred.
So needy is the world for U.S. supplies after eating through South American availability in record time that U.S. exports of corn plus wheat plus soybeans will establish a new record high for August, normally the sleepy end-month of the crop year. This year U.S. ports are already in high gear before harvest has even begun. And there’s more to come, with near-record unshipped sales totals on the books.
The outlook for Fall right now, presuming no last-minute problems with crop development or prolonged rains that delay harvest, is for record-large corn and soybean supplies to overtop available storage facilities. But with both corn and soybeans in hot demand, that should be brief. The logistical complications of locating and moving into storage space such large tonnage, and then loading it out to Gulf and Pacific Northwest ports, will be more complex this year than ever and should present spread-trading opportunities. And whether U.S. soybean supplies can satisfy world demand for a few months longer than South America did will clarify much about what shape world food supplies will be in next year.
By this we do not mean to tease with an implied bullishness. China has large stockpiles of both corn and soybeans that it is selling internally, and other grain-producing countries have invested heavily in shipping facilities to compete with U.S. for a larger share of lucrative and still-expanding world food demand.
Kottke Associates is a Multi-Manager CTA platform specializing in fundamental-discretionary managers focused on niche strategies within an individual commodity market.