Funds covering short positions on planting worries
The majority of the week the focus in the grain and oilseed markets has been on the delayed planting headlines circulating throughout the U.S.
Corn planting last week was reported at 30 percent complete, leaving a large gap to fill ahead of next week’s progress report. Trade often considers the third week in May’s progress critical in terms of yield. The odds start to heavily favor a corn yield below trend on years where the planting progress has not reached 70 percent. This leaves 40 percent of the crop to be planted in a week, which is highly unlikely given updated forecasts.
Analysts are working on different scenarios of what this year’s corn balance sheets could look like. One scenario includes using a conservative and very possible 2 million reduction in planted acres and a decline of six bushels per acre to yield 170.
In this example, ending stocks could drop to 1.5 billion bushels. Leaving demand alone would equate to around 10 percent stocks-to-use, which has been historically tight. The latest estimate by the USDA was for nearly 17 percent.
The firm Informa updated their acreage estimates last week. They estimated corn acres at 90.69 million acres, down 2 million acres versus the USDA’s figure of 92.79. Informa soybean acres estimates are 1.8 million acres above the USDA at 86.44 million. All wheat acres are estimated at 45.28 million versus the USDA at 45.75 million.
In June, the USDA will release their revised acreage estimates. Looking back, the largest acreage declines between the March and June reports has been 3.3 million acres. This was recorded in 1995, followed by a 2.1 million acre decline in 1993. In 1993, the final corn acreage was down an additional 1.1 million acres from the June report.
The latest run of the GFS model is predicting large volumes of rainfall through the end of the month. If realized, the central and eastern Corn Belt, along with the southern Plains, could see totals between 6 and 10 inches. With already saturated soils in many of these areas, prevented planting may be even more likely.
The weather issues plaguing the largest corn producing areas in the U.S. have led the fund crowd to start covering their short corn positions. It was estimated that the funds were net short nearly 350,000 corn contracts at the end of April. As of Thursday May 16th, they were estimated short 260,000. Recent data from FC Stone showed that since May 2014, there has been 7 times that the funds have held a sizable short position in corn. Each of these times, they covered these positions and went long 100,000 contracts or more, in relatively short-order.
Since January, the December 2019 corn futures contract has only traded in a 42 1/4 cent high to low cent price range. This is the tightest range seen in 11 years. Prior to this year, the next tightest was in 2017, at 82 cents. The Olympic average (removing the high and low) over this time period has been $1.91 with $1.05 the average of the most recent 5 years.
It wouldn’t be a typical week if we didn’t discuss Chinese trade negotiations. Late last week President Trump announced that at 12:01 on Friday May 10th, tariffs rates on nearly $200 billion of Chinese exports increase from 10 percent to 25 percent.
This was the first escalation of tariffs since September. This comes after China backed away from some of the commitments it had previously made in the new trade deal. China announced they will retaliate by adding tariffs on U.S. goods. A statement released by China said they’re proposing to set import tariffs on $60 billion in U.S. goods, on over 5,000 U.S. products. Tariffs are set to be enacted on June 1st. Discussions are said to be ongoing but fresh news has been sparse.
Agriculture Secretary, Sonny Perdue, confirmed that a new program is in the works to help aid the struggling farm sector. This aid is expected to give U.S. farmers between $15 and $20 billion in relief, this would be in addition to the $12 billion aid offered last fall. There is a considerable amount of unknown with this subsidy package, including who will receive payments and how it will be structured.
For more information, you may contact Mick Hoover at (515)-200-5115, or e-mail at email@example.com. The opinions and views expressed in this commentary are solely those of Mick Hoover. Data used in writing this commentary obtained from various sources believed to be accurate. This commentary is intended for informational purposes only and is not intended for developing specific commodity trading strategies. Any and all risk involved with commodity trading should be determined before establishing a futures position. Please visit our Risk Disclosure Page for more information on commodity trading.
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