WHAT COULD CAUSE THE FUNDS TO COVER?
Overview
Mostly higher prices in the grains following the sell off the past few days. As all fo the grains aside from corn who continues to trade slightly lower, making new contract lows.
Yesterday both corn and wheat made new lows.
Today, the wheat market managed to hold yesterday's lows, while soybeans led the way higher today. Taking back a good chunk of the the 2 day -45 cent sell off.
Beans mainly higher with Brazil forecasts looking dry. As well as news that the estimates for Brazil's bean crop come in at 155 million metric tons. This is a -5% drop from what the USDA currently has forecasted.
Why did we make new lows in corn and wheat?
There was no fresh news to support the lower price action. Matter of fact it was simply a "lack" of bullish news to feed the bulls.
Once corn and wheat came face to face with those lows yesterday and we were not able to hold, this triggered additional technical selling and selling from the funds.
The funds main goal is to make money, as is anyone else’s in the market. Here are the rough numbers of their current positions.
Corn: Short 185k
Chicago: Short 108k
KC: Short 48k
MPLS: Short 28k
Beans: Long 82k
Bean Meal: Long 138k
The funds believe this is their best way to make money currently. Short corn and wheat, while being long the bean complex.
One thing to keep in mind here.. the funds do NOT ride a losing position. If things start to go sideways and the tables shift, they will jump shift and liquidate that entire position.
So what are some things that could cause this to happen?
For corn and beans, they are both largely going to be determined by this South American crop as forecasts.
Mark Gold from Top Third said:
"I think the USDA and Brazil will have to start ratcheting down these expectations of crop sizes out there. We are heading into December & January which are the key growing months for beans. They are very short moisture in the northern part of the country, they are too wet to the south. I don’t think that will make for a crop that's a bin buster."
The US models suggest Brazil will be hot and dry once again.
Here is the current outlook for Brazil:
Now yes, this whole Brazil situation will have a far more direct correlation to beans rather than corn. Even though yes, I believe Brazil could have a big safrinha corn problem down the line. But it may take the markets a few months to come to that realization.
So what could give the funds a reason to cover corn?
Well we have a massive carry out. So a major rally will not be an easy task here short term, but it's possible.
Corn will need a change in the demand story and they will need China to step in with a large appetite.
What about wheat? There are a few "potential" factors that could cause some short covering. Those being, an unknown black swan event, the war, Australia crop size, and Chinese demand. We also have the fact that at the end of the year, the funds often look to "rebalance" and take profit.
We will touch on these more later in today's update.
Before we get into the update. Here was a question from Jared from Illinois that he asked us.
He asked:
"How can I capture the carry on my corn basis contract?"
Our response was:
"Some guys don't know this, but when you do a basis contract you sold your corn. Once it's delivered you no longer own it. If the company goes bankrupt, your corn is not protected by the USDA like it would be if it was on open storage.
Once you deliver on a basis contract, you are long FUTURES in the buyers account. If you roll and don’t price, you will be deducting the carry and possibly fees from your basis or net price received."
His response:
"How do I capture the carry on the corn then? I have corn in my bin how can I capture the carry?"
Our response:
"You can capture the carry by making deferred delivery cash sale or locking in the futures portion via either an HTA or selling futures in your hedge account.
If you already have an HTA or futures sold, you roll to the appropriate month.
Just putting the corn in the bin by itself DOES NOT lock in any carry, It exposes you to flat price. The definition of a carry in our view is getting paid more to deliver the grain later than nearby and locking it.
When deciding if you should do a cash sale for later delivery or to use futures, you should consider your basis outlook, time of year when you want to deliver along with local supply outlook for that time. Typically in a carry market, one should wait for basis and use futures versus a cash sale."
He then asked:
"Can I lock in carry without setting the price?"
We said:
"Yes you can but it is very tricky and it only locks it in if you actually get priced at some point. You can do this by buying the nearby contract and selling the deferred."
For those of you that are familiar with DTN, one of their biggest approaches is about what the futures spreads are telling us. A carry market means that the end users will pay you to store the product because they don’t need it right away.
An inverted market means that they need the supply sooner than later. An inverted market is bullish, while a carry market is bearish. Notice that soybeans have a carry to July, but then inverted to new crop of 24.
Corn and wheat have big carries... if one is selling these sell the carry.
One bullish sign out there is the bean oil and meal... both are inverted.
Take a look at the following market structures:
Today's Main Takeaways
Corn
Corn slightly lower again after posting new lows yesterday.
Why did corn drag lower while the rest of the grains rebounded today?
For starters, the weather in Brazil is more impactful for soybeans. The sarfihna corn crop worries are coming, but not quiet there yet.
We also have a tight carry out situation in the US for beans, something we do not have in corn.
I think we could start to see the funds decide to reposition themselves sometime within the next few months. (late December to perhaps as late as February). But until they decide to do so, we could very easily see them become complacent holding their shorts. Keeping corn stuck in this lower range looking short term.
Because right now we do not have that factor to ignite a major rally.
Am I saying we will go to $4? No, not at all. I am simply saying a rally past $5 won’t be that easy right now. The path higher for corn corn will be a long bumpy one.
The funds and algos like nice round numbers. So perhaps this $4.50 level is where they will keep the support at.
With our corn this cheap, it is only a matter of time before China starts to come in. Then we have the Brazil situation... now this is one that could ignite some short covering.
Wright on the Market said:
"There cannot be a good safrinha corn crop in Brazil. The rainy season has not started yet and the first crop will be beans no matter when the rainy starts."
If Brazil doesn’t have a crop to send out into the market, this will only help boost exports from the US.
Now is this Brazil crop an immediate factor? No not right now. But in the coming months we could be looking at a big problem for their crop.
Once we get into January we are going to be looking at late planted corn, lower acres, and dry subsoil moisture.
Another thing to note, 70% of their corn is grown in the north. The area suffering from the severe drought.
From Shawn Hackett:
"I don’t believe the corn market will be comfortable enough discounting (the Brazil situation) below $4.50"
Right now it looks like we are in the process of carving out lows. Could we trade lower to perhaps $4.25? It is a possibility, but I do not think it is the most likely scenario.
On the charts, as mentioned, often times big money is attracted to the round numbers such as $4.50 and $4.25. Right now that is our downside risk. For corn to go higher we need a change in the demand story, the Brazil story to unravel, and the funds decide to get rid of their massive short position.
Corn Dec-23
Corn March-23
Soybeans
Beans get a nice rally here following the -45 cent drop the past two sessions.
Brazil weather premium pumped soybeans up near $14 two weeks ago, but the thought of some possible rains gave that premium back.
Perhaps today was the start of us adding that premium back in.
From Shawn Hackett:
I think right now $14 is the appropriate weather premium price until we get a clear answer on the Brazil crop.
Diego Meurer said:
"I traveled 2,300 km in the State of Mato Grosso, Brazil and the scenario of soybean crops is the same, entire crops dying, the rains did not arrive and those that did were low in volume or in indigenous reserves."
He also said, "Mato Grosso is heading towards the biggest crop failure ever seen."
Bottom line, soybeans will be dominated by the Brazil story. In my opinion, it looks bullish. But I am far from a weather man. What I do know is that the weather in December and January will be far more important than the weather we saw in November. If December is anything like November, watch out. We could see fireworks. If the Brazil story gets worse, don’t rule out $15 beans.
On the flip side, if rains do start to fall of course we will futures take it on the chin. Manage your risk accordingly.
Now let's take a look at the charts. I will include a close up view as well as a zoomed out one to paint a more clear picture.
For the first one, you can see we are stuck in a wedge. The downside risk for beans is that bull trendline around $13.15.
Bulls? You want to break that upper trendline right around $13.95.
Big money sadly likes to pay attention to these silly lines.
If we take a closer look short term, we did paint a head and shoulders pattern which is a bearish pattern. But we bounced right off that 38% retracement and closed right at the 50% retracement. Next targets are $13.63 and $13.88.
Soybeans Jan-23
Wheat
Wheat finally gets a bounce. After posting new lows yesterday. On the bright side, we did hold those lows today.
Why the bounce?
For starters, the funds might be getting exhausted. Continuing to send wheat lower. Perhaps they think they have done enough damage for now.
We have a record short fund position.
There is a lot of fund position moving that happens the month of the year. People that have been short have made money, now they might want to take some of those profits.
This alone could cause a pretty good short covering rally to close out the year.
We also have rumors that Russia will start selling less wheat. Which would lead to more buyers coming to the US. The US is actually somewhat competitive on the global market place right now. If this were to happen, exports along with short covering to lead to more than just a short covering rally.
Bottom line, I think we are near the lows if we haven’t made them. I know that sounds like a broken record as we have been wrong about the bottom in wheat before, as has every bull. But at a certain point, the downside just get's so exhausted that some start to think the only way from here is up.
Wheat is still a sleeper. It may not happen next week, next month, etc. But in due time the wheat market will take off.
Right now, bulls simply just need a story. A singular reason for the funds to want to get long. There just isn't one today. But I look for the end of the year to start to change that momentum. There is plenty of upside, but it doesn’t have to happen soon.
We held yesterday's lows. Another move higher tomorrow would be a good indication of carving out a bottom. Guess we will have to see.
Chicago March-23
KC March-23
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