Healthy Correction?
Teucrium | January 27, 2021
A Healthy Correction?
The relentless advance of grains prices was stopped cold as front month corn, soybeans and wheat futures all closed lower last week. The price action was a good reminder that as fast as prices can rise, they can, and often do, fall faster. The move has undoubtedly left some market participants wondering if the selloff was simply a near term correction or the beginning of a new downtrend lower.
Some have suggested that the markets were due for a pull back. Front month corn futures had rallied over 27% from December 1st through January 14th. Front month soybeans had rallied nearly 23% in the same period. By the close on Friday the 22nd corn was off approximately 6.3% from the highs and soybeans had given up roughly 8.6%. Within the context of the recent rallies higher, the selloff in corn and soybeans may have simply been a “healthy correction.”
Tipping the Scale
Both the corn and soybean futures markets had been one-sided with the CFTC Commitment of Traders report showing record longs held by the large speculative trader in corn but not the case within soybeans. Traders will tell you that marketing positioning matters and when the market gets too “one-sided” it can often be a warning sign.[1]
It appears that forecasts calling for much needed rain in key South American growing areas was enough to tip the scale, igniting a flurry of selling as longs sought to take profits.
Additionally, the speculative longs may have been considering continued market chatter surrounding US 2021-’22 crop year planting. The expectation is that high prices are going to lead to a year over year increase in total acres planted. According to DC Analysis, trade estimates for 2021 US planted corn acreage are upwards of 93 – 94 million, versus the 90.8 million acres planted last year. Likewise, trade estimates for the 2021 US planted soybean acreage are 89-90 million acres versus 83.1 million acres last year.
The increase in acreage planted lays the groundwork for a record 2021-’22 US crop. The potential for the added new crop supply could act as a headwind for prices moving forward.
Finally, talk of African Swine Fever (ASF) in China resurfaced last week. China is still rebuilding their hog herd following the 2018 ASF outbreak that analysts believe wiped out up to 50% of the existing herd. The record Chinese grain demand is likely tied to a growing hog herd (soybeans are primarily used as protein in the animal feed ration). The potential return of ASF bears watching.
Balance Sheets Are Still Tight
All things considered; the fact is that grain balance sheets are still very tight relative to history. Corn and soybean prices have rallied in the face of record Chinese demand while production has struggled to keep pace. The result is low estimated Stocks/Use[2] ratios which are likely to be supportive of prices in the near and intermediate terms.
The table below is a snapshot of the US Soybean Balance Sheet. Note the Stocks/Use ratio highlighted in yellow. Current estimates show the balance sheet, with a Stocks/Use ratio of 3.1%, is as tight as it has been since the 2014-’15 crop year.[3]
Table 1:
Bulls Back in Control
As of this writing (Tuesday 01/26/2021) both the corn and soybean markets have recovered from last Friday’s low. It appears that the trade has taken the opportunity to “buy the dip.” While bulls may see this week’s early action as a promising sign, traders will likely be looking for the markets to extend to new highs. Failure to reach new highs might be a negative sign.
While no one knows which way prices will turn next, it’s clear that increased volatility is likely here to stay. Last week’s action is a good reminder that prices can retreat quickly.
Commodities and futures are generally volatile and are not suitable for all investors. Note that options are available on Teucrium’s ETFs. Please speak with your broker or Financial Advisor.
[1] The CBOT Commitment of Traders Report (COT) released weekly reveals the market positioning. You can find our summary of the COT report on our website www.teucrium.com and on our Twitter Feed @TeucriumETFs
[2] The Stocks/Use Ratio compares Ending Stocks (beginning stocks + production – total usage) to Total Usage. A higher number indicates a larger supply relative to demand while a lower number indicates a smaller supply relative to demand.
[3] You can find Teucrium’s complete WASDE summary document at https://teucrium.com/documents