CORN FIGHTING NEW LOWS & BRAZIL RAINS

Written By Sebastian Frost

MARKET UPDATE

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*Note: Due to the holidays this will likely be our last write up for the week as we are traveling with the holidays. We will still have audio commentary. For those of you who are market update only subscribers, you will be sent a few of our audios to make up for lack of write ups.

Overview

Grains mixed here as soybeans get hit the hardest while corn looks to test those late November lows of $4.70. Which is a must hold level on the charts.

The reason for corn trading lower the last few days isn’t because of anything negative, it is more a lack of any fresh bullish news.

Despite getting a new sale of beans this morning, soybeans were pressured heavily from Brazil forecasts. Rumor is that China is looking for another 4 to 6 cargoes of US beans.

Soybeans lower because of the Brazilian forecasts. As they are looking for roughly an inch of rain in northern Brazil the next couple of days.

The models don’t seem to completely agree, so we will have to see what actually falls. As of late, the models have shown a lot wetter forecasts than what actually fell.

Despite these showers in the forecast, they still don’t look like a total trend changer. If these rains fall, it will certainly help the crops. But they will still need a lot more rain to divert further issues.

Friday I said that this week for Brazil will be key. I still believe so. If these rains fall, the market will likely take it on the chin. If these rains fall there is still a chance they can produce a somewhat normal crop. However, if these rains miss or come up short, they are in for some major problems.

Here are what some others are saying:

Mark Gold from Top Third:
"One inch of rain isn't going to save this crop. The heat is anywhere from low 90s to 110 degrees. This is right in the middle of pod setting. I think it's going to be a major problem out here for the beans"

"One group lowered their Brazilian estimate by 2 MMT and I think that is going to be the pattern moving forward that we are going to see lower and lower projections. This new projection has it under last year's prouduction numbers even with the increase in acres. So I think this will be a little significant."

Jim Gerlach:
"While 2 to 4 inches of rain in central/northern Brazil sounds impressive over the next 14 days, that equates to just about 75% of normal and follows the driest October to December period since at least 1979."

Brazil Producer Diego Meurer:
"Third largest producer in Brazil, Goias on December 18th has two rains. One of 8 millimeters and another of 10, but there is no longer a solution. The soybeans have already surrendered and died."

Ag Strategy:
"Brazil is facing a soybeans disaster. The crop is heading towards 145 MMT. The market is in denail and will be shocked by the crop shortage."

Agricomp Commodities:
"A lot of people think 145 million is a crazy number. But it's not. It's just a 10.5% drop over the initial Brazil forecasts."

Juliano from Brazil:
"There will be a sequence of rains. For most areas these rains will only stall the losses, which are irreversible."

Dr. Cordonnier lowered his Brazil estimates. He lowered his corn by 1 million to 117 million metric tons vs the USDA's current 129. He lowered his bean crop to 155 million vs the USDA's current 161.

That is a pretty sizable cut from one of the most respected individuals in the space.

We also saw farmer group Aprosoja project that Mato Grosso will produce -9.16 million metric tons less than last year. That is a -20% drop. Keep in mind, Mato Grosso is far and away the leading growing state for both Brazil corn and beans. They are responsible for 29% of Brazil's annual soy exports and a whopping 66% of their corn exports..

Unless they get game changing rains, it does look like lower projections are going to continue to be the theme moving forward.

What are the forecasts saying?

The GFS is drier and the Euro model is wetter for the next week. Something to note is that the GFS model has been a lot more accurate the past few months. Guess we will have to see who is right this time.

Here is some comparisons of the forecasts for the 2 models.

Brazil is hoping these rains in the euro model fall. If not, just look at the drastic change in root zone soil moisture the past 14 days alone.

I have been saying for weeks that December will be far more important than November for Brazil weather.

October and November was the driest on record. How is December shaping up so far?

Again, even just the beginning of December, driest on record for much of the producing states.


Now let's jump into today's update..

Today's Main Takeaways

Corn

Corn lower again here as we look to test those recent lows from late November. Today we also made a contract low close.

Corn is trickling lower because bulls just don’t have much to chew on here. Other than the funds being short, there just isn’t a "reason right now" for corn to push higher.

We have the Brazil situation, but as I've said in the past, this could be a story that takes a while to unfold.

As I mentioned, Mato Grosso makes up for a massive 66% of Brazil's corn exports.

The same state that has been getting brutally hit by heat and lack of rain and just suffered the worst October to December drought in nearly 50 years.

We saw headlines for a short time where China claimed they had this record corn crop. Yet, we haven't seen anything since. At the same time, China has been very activing buying wheat and corn from non traditional origins.

Yesterday it was reported that China imported a record large amount of corn in November and imports are up 12% from last year.

Which could mean one of two things, or perhaps both. They are either scared of the Brazil production, or they are lying about having a record crop. Bottom line, the recent action from China doesn’t support they are as comfortable as their "new record crop" suggests. Just another reason I do believe China will start to step in here and buy our corn eventually.

Now there is definitely some risk in our market. We still have a massive carry out here in the US. The market probably won’t take the Brazil corn situation into consideration until at least January or even February.

Seasonally, we go higher until January. As every year for the past 16 years we have rallied into January following the December WASDE.

The risk that we need to watch out for is that break those old lows and see the March contract try to go down to where the December contract was. Similar to how the December went down to where the September was.

What do bulls need? First off, we need to hold those lows, otherwise we likely trigger more selling. But bulls need the market to realize the Brazil situation. They also need to see demand come in and stabilize this market and spark some short covering from the funds as they remain heavily short still. Perhaps they look to somewhat rebalance their positions after the 1st of the year.

Bottom line, we have some risk short term and potentially heading into the new year. But I think the funds will look to start rebalancing here soon as we head into the new year and think the Brazil is long term very beneficial for the corn market. But until then, it will not be an easy rally with our situation here in the US. We also have the risk that they up production in the January report.

Longer term, we see higher prices. The time to be making sales in spring and summer.

We have talked many times about the concept of courage calls. What they are supposed to do is encourage you to make a sale when the market rallies. We don’t want to chase the rally. We want to buy low and sell high.

With corn near its lows, now wouldn't be the worst idea to consider owning courage calls, we like going with the February calls to get us through the January USDA report.

For those of you that have to make sales in the next 60 days, your risk is that the market continues to be slow at coming to the realization of the Brazil situation and the possibility that the USDA could throw us a curveball and increase yields in the January crop report.

If you have questions or want more tailored advice shoot us a call (605)295-3100 and we'd be happy to help.

Taking a look at the chart, we NEED to hold $4.70 or we will likely make another leg lower. The next downside target could potentially be in the $4.55 range if we fail to hold.

Corn March-23

Soybeans

Soybeans lower following yesterday's higher price action.

Beans were lower on forecasts calling for rain in Brazil.

Can Brazil still produce an "okay" crop?

Yes it is possible. Nobody, even apparently the weather men cannot tell what the future holds for their weather.

Our job isn't to out guess the market, it is to have you prepared for every curveball thrown.

I can give you all of the reasons in the world why soybeans will be going much much higher if Brazil's crop fails. But you need to be comfortable if the crop happens to not be as big of a failure. So how do you do that?

If you are not comfortable then do whatever it takes to get comfortable. It might mean making a sale. It might mean buying put options to put a floor in place.

Give us a call if you want specific recommendations for your situation. (605)295-3100.

I do believe Brazil will have a problem whether they get a few rains or not. I'm sure you have heard the argument of people saying look at how our crops here in the US turned out after our drought.

That is not an entirely valid argument. First of all, the two droughts are happening at different time periods relative to importance.

Our crop received plenty of rain exactly when it needed it. If Brazil does not receive in December, it will be a mess. They need rain in December.

The other element to this argument is that Brazil has completely different growing soil conditions. They have sandy soil that does not hold moisture like our ground does, making rain all that more important.

So bottom line, there is a chance they are able to produce an "okay" crop. But the clock is ticking. Fast.

Looks like they have about an inch of raining. Some argue it's not enough, some say it will go a long ways in saving the crop. Guess we will have to see how it shakes out.

Longer term, there are plenty of other factors such as the sustainable aviation fuel story and a tight situation here in the US that lead me to believe there is still a ton of upside. But if this Brazil crop comes out bigger and better than the bulls are hoping, we do have a lot of downside risk.

Looking at the chart, we need to hold that lower trendline which we have bounced off of several times. We need some solid action back above $13.26 to bring on more buying. The funds also hold nearly a complete neutral position right now. If this Brazil weather gets worrisome, it gives them all the more power to add on more longs.

Unless they get significant rain, I expect breaks like today to be bought back. With temps of over 100 degrees, if the rains this week disappoint it could be a significant factor. $14 or $15 beans are both possible. $12 beans are also possible. It all comes down to Brazil.

Soybeans Jan-23

Wheat

The wheat market was higher today mainly off some weakness in the dollar as it continues it's recent downfall which helps our export story.

The big things bears continue to point at is still a ton of cheap wheat flowing out of Russia. This story makes it more difficult to create a major world supply fear.

Bulls have been disappointed that we haven't got any more purchases from China following their record amount the other week.

Wheat like all grains really needs to have a story that money flow or the funds want to get behind. Until then we like just being patient for those of you that have holding power.

For those of you that don’t have holding power, be proactive enough to get yourself comfortable.

Ways to get comfortable if you are worried about prices falling include making a sale, buying puts for protection, or selling futures as a hedge.

If you need help or want to discuss your situation please give us a call at (605)295-3100.

The thing to keep in mind for the corn and wheat market is the fact that the structures having the carry that they do is not a bullish sign.

When you are in bear markets you are suppose to sell nearby then roll and pick up the carry.. That is the type of markets corn and wheat are in.

If you think they might turn to bullish markets, you want to make sure to have your hedges down the forward curve line as far as possible.

Bottom line, if we want to extend the rally, we are going to need a catalyst. Whether that be China coming back for our wheat, a weather scare, or any other potential wild card. But we will need one, otherwise short term we might just be stuck in this recent range or perhaps trickle lower unless the funds decide it's time to cover more shorts.

Long term, I still view wheat the market as a sleeper with all of the upside in the world. But that doesn’t mean that the upside will happen in the time frame any of us thinks. I could see the funds look to rebalance as we head into the new year.

Bulls need to hold $6 to prevent more downside. They also want to take out the recent highs of $6.49 to open up the charts.

Chicago March-23

KC March-23

Want to Talk?

Our phones are open 24/7 for you guys if you ever need anything or want to discuss your operation.

(605) 295-3100

sfrost@dailymarketminute.com

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Sebastian Frost
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