If you’ve been paying attention to ag media recently, you know talking about futures spreads and forward curves has become “cool”, much more so than it was 18 months ago. Recall then the favored themes were trade wars are good for US industries, including agriculture, and USDA was the be-all and end-all of market fundamentals. Fast forward to today and the climate has changed, with many of those who sat on the other side of the table now comfortably on the bandwagon that we can read real supply and demand in markets and private research holds the key to the most up to date fundamental data (e.g. planted acres, crop conditions, yield estimates, etc.). Honestly, after 30-plus years of tilting at the same windmills, I never thought I’d see the day this type of perception change would occur in US agriculture. Sure, as we head into another set of over-hyped numbers scheduled for release this coming Wednesday, US grain quarterly stocks and prospective plantings, ag media will continue to hammer on how important these numbers are. But the reality is the industry has evolved and these reports resemble a big rock falling into the river below. It makes a splash, but in the blink of an eye the wider river rolls along, not changing its course, and the event is forgotten.
In this piece, I’m going to lay out what the markets are telling us about old-crop 2020-2021 stocks and early new-crop 2021-2022 expectations. To do this, though, we have to accept a couple points:
- Regarding old-crop, USDA’s beginning stocks is not a valid starting point. As I’ve talked about countless times, USDA systematically overestimates or underestimates US ending stocks of grain to the point the numbers are irrelevant. Given this, the best data available for a starting number is the Q1 stocks figure arrived at by survey. Is it perfect? Absolutely not, but like Cattle on Feed (monthly) and Hogs and Pigs (quarterly) it gives us a general idea. I’ve made the argument before USDA’s monthly grain reports should be similar to Cattle on Feed, making no projections but rather a monthly reporting of available supplies, but those arguments have fallen on deaf ears.
- Gauging prospective plantings changes based on the previous year is also farcical since USDA’s planted and harvested acres are always highly questionable. And when we take a step back and think about it, does it really matter what planted acres are? The key is production, which is a function of weather, leading to another point I’ve made countless times that production ag futures are nothing more than weather derivatives. This is why research firms pushing the industry forward on yield projections using real data are in such high demand.
Starting with old-crop stocks for all wheat, the Chicago (SRW) March-May futures spread trended down over the course of January and February, moving from an inverse of 2.25 cents to a carry of 6.5 cents. Though still bullish on March 1, it was far less so than it had been. Similarly, the Kansas City (HRW) March-May spread saw its carry strengthen from 2.75 cents on January 27 to 9 cents on March 1. The Minneapolis (HRS) March-May spread saw its carry move from 8 cents to 12 cents during January and February, bordering on being bearish, before rallying to only a 5-cent carry on March 1. What is my conclusion? Recall from my end of February available stocks-to-use calculations wheat came in at 41.5%, down from the previous month’s 42.7% and previous quarter’s (end of November) 44.7%. Given this, I’m expecting quarterly demand to be less than the previous quarter’s calculated 484 mb and March 1 stocks to be tight, but not extremely so.
As for prospective plantings, the July-September Kansas City futures spread fell from par on January 28 to a carry of 4.75 cents on March 1, again indicating the commercial side was growing more comfortable (less bullish) with the potential production situation, whatever planted acres might actually turn out to be. During the month of March as rains moved across the US Southern Plains this spread has moved to a carry of 6.5 cents, covering a neutral 53% calculate full commercial carry (cfcc). The interesting thing is if the spread breaks support at this level, it could work its way into negative territory at 67% cfcc or more. The Chicago July-September spread remains bullish, closing March 1 at an inverse of 2.2 cents. And while wetter weather across the US Midwest has pushed the spread to a 1 cent carry, the commercial view of SRW remains bullish. As for spring wheat, the new-crop Minneapolis September-December futures spread trended sideways over the course of February with the weak carry still bullish, indicating less possible production at harvest. However, the month of March saw the spread’s carry strengthen to a neutral-to-bullish level of cfcc.
It is well documented how USDA overestimated US corn ending stocks the previous 4 marketing years, with the “why” largely a moot point at this time. Corn’s December 1 quarterly stocks were pegged at 11.3 bb, the smallest Q1 figure since the 2015-2016 marketing year, with Q2 seeing the March-May futures spread moving from a bullish 3.25 cents carry on December 1 to an extremely bullish 8-cent inverse on February 26. This spread would stretch the inverse to 18 cents as the March issue moved into delivery. This tells us Q2 demand was big, extremely big, pulling on already tight supplies. Recall my end of November available stocks-to-use calculation came in at 12.1% with my end of February figure a much tighter 11.3%. A year ago my end of February number was 12.2% and USDA released a March 1 stocks figure of 7.951 bb. Based on all the evidence, this March 1 number should be lower than last year.
This past fall and winter, September through February, the November soybean contract was priced at a level versus December corn indicating the US soybean market needed more acres planted in 2021. However, we have to remember that US producers, unless weather intervenes, will plant corn whenever and wherever possible. Here I’m going to look at both new-crop corn’s Dec-March spread and Dec-to-July forward curve. The spread has seen its carry strengthen from 3.75 cents on November 20 to 7.75 cents on February 26, still covering a bullish level of cfcc, just less so over the span of the quarter. The month of March has seen the carry continue to strengthen, closing this past Friday at 8.25 cents and covering 31% cfcc. The new-crop forward curve has seen similar activity, posting a high of 2.5 cents carry on November 20 before falling to a carry of 13.75 cents on January 22. The bottom line is 2021-2022 supply and demand (beginning stocks, acreage, production, demand, ending stocks) remains bullish, largely due to the tight old-crop stocks-to-use situation. How bullish new-crop stays will depend on weather over the spring, summer, and fall.
Nearby soybean spreads started the process of turning bullish a year ago this month, reflecting a tightening global supply and demand situation as China continued to ignore US supplies while draining South America of nearly every soybean available. By the time we got to August, futures spreads had already heated up and futures contracts were starting to follow. As we closed the door on Q1 at the end of November my US available stocks-to-use calculation was an incredibly tight 2%. However, this turned out to be only the beginning as my end of February number came in at 0.7% versus the previous February’s 12.2%. If we hadn’t watched this drama play out, and had someone just tell us about it, few would believe such a tale. USDA’s March 1, 2020 quarterly stocks figure came in at 2.255 bb, but this year’s number won’t be anywhere near that. The March-May soybean spread was a wild ride over Q2, with the bottom line being even the weak carry it registered was still bullish.
The 2021 crop will see more acres planted than the 2020 crop, but that isn’t the important issue. The November-to-July forward curve closed this last Friday at an inverse of 17.5 cents, well off its high of 63.75 cents inverse from January 14, but still an inverse. And as I often say when talking about storable commodities, an inverse (or backwardation for New York markets), any inverse, is bullish. Why is this bullishness decreasing, though, if old-crop US supply and demand is in position to make a run at record tightness? I don’t like playing the “why” game, but the “what” of the downtrend in the forward suggests more acres, better weather, a potential slowdown in demand as more South American supplies become available, the continued trade tension between the US and China, etc. are all solid possibilities. The key is the market is telling us the tight available stocks-to-use situation is expected to last at least through the next marketing year.
And that’s thinking forward.
Until next time,