We’ve reached Labor Day weekend here in the United States, the unofficial threshold of fall harvest season. And as with everything else about 2020, recent market action in corn and soybeans has complicated the decision of what to store and what to sell. Therefore, let’s employ what I like to call The Gamblers’ Secret to see if it holds any wisdom for this year’s situation.
What is The Gamblers’ Secret, you ask? Those of you old enough to remember the Kenny Rogers’ song from 1978 (written by Don Schlitz, I like to give credit to writers) might remember the lyrics, while the younger crowd may have to Google the song. Verse 4 starts with, “Every gambler knows, that the secret to survivin’, is knowin’ what to throw away and knowin’ what to keep…”. Since I got into this business 30-some years ago, I’ve applied The Gamblers’ Secret to this annual roll of the dice and “for a taste of your whiskey I’ll give you some advice.”
First things first: What do we know about the four markets? Yes, I mean four, as I’m looking at the structures of both cash markets (given 2019 bushels are theoretically 100% sold) and new crop futures (Dec corn, Nov soybeans). Let’s look at the secondary trends we are dealing with as we head into harvest:
- Cash corn (cmdty National Corn Price Index, NCPI) is up, as is its major (long-term) trend.
- Cash soybeans (cmdty National Soybean Price Index, NSPI) is also up, along with the major trend.
- Dec corn futures are in a secondary uptrend.
- Nov soybean futures are also in a secondary uptrend.
Based on Newsom’s Market Rule #1, “Don’t get crossways with the trend”, all four markets are generally on equal ground. Let’s move to Rule #2, “Let the market dictate your actions”, for this one tends to separate the wheat from the chaff:
- Cash corn fundamentals are neutral, with national average basis calculated at roughly 34 cents under December futures heading into the holiday weekend. The previous 6-year average was about 32 cents under.
- Cash soybean fundamental are also neutral, with national average basis calculated at about 59 cents under November futures last Friday with the previous 6-year average 66 cents under. Note soybean basis is slightly above average while corn basis is slightly below.
- The carry in the Dec-to-July corn forward curve (series of futures spreads) covers roughly 35% of calculated full commercial carry (cfcc, total storage and interest of holding bushels in commercial storage), just outside the bullish range of 33% or less.
- The carry in the Nov-to-July soybean forward curve covers almost 13% cfcc, reflecting an incredibly bullish long-term fundamental situation.
Given this, what are the markets telling us to do? Neither forward curve is showing merchandisers are willing to pay producers much to hold bushels off the market. However, with soybean basis above average the indication is the market wants cash soybeans sold up front to meet demand. This makes sense given the U.S. ships an average 75% of its total marketing year exports in the first six months of the new marketing year by the time late February rolls around, the global market largely switches back to Brazilian supplies. Can we clear the picture up more if we apply Rule #3, “Use filters to manage risk”?
- Seasonally (10-year index),the NCPI tends to gain 15% from the close the first week of October through the first weekly close of June. If we see a normal 8% decrease during September, the June high weekly close would be projected at $3.43 as compared to last Friday’s calculation of $3.24. If the NCPI posts a high weekly close of $3.43 it would be in the upper 43% if its price distribution range, just a nickel away from the upper 33% at $3.48.
- The seasonal tendency (4-year) for the NSPI is to rally 8% from the close the first week of September (last week) through the close the third week of February. Based on last Friday’s calculation of $9.10, the seasonal high weekly close projection comes in at about $9.80. Recall from Monthly Analysis of the NSPI’s long-term trend, the major upside target is the previous high of $9.98 from March 2018.
If you are thinking Rule #2 and Rule #3 are contradicting each other this year, you would be correct. What else could we possibly expect from 2020? Therefore, let’s see if we can know what the cards are by the way the two markets are holding their eyes:
- Soybeans are a solid Type 9 market, the most bullish type of market in commodities, with the uptrend supported not only by the incredibly bullish commercial outlook (forward curve) but also by noncommercial traders adding to their long futures position. Recall from Report Commentary following last Friday’s CFTC Commitments of Traders report that this group increased their long futures to more than 248,000 contracts, their largest holding I show back through September 2018.
- Corn is a Type 8 market, with the difference being fundamentals thar remain neutral (though leaning toward bullish). Meanwhile, noncommercial traders have provided support mostly by covering short futures positions rather than adding longs positions. To be specific, the short futures position has been trimmed from almost 443,000 contracts the week of August 4 to about 248,000 contracts the week ending September 1. The net result is a sharp decrease in total open interest (futures) over the last month, with the week of August 3 showing total holdings of 1,634,359 contracts as compared to 1,391,458 contracts reported at the end of last week. Over that same time Dec corn rallied from $3.20 to $3.64.
Going back to the textbook I used to teach myself technical analysis, “If…prices are rising and open interest declines…, the rally is being caused primarily by short-covering (holders of losing short positions being forced to cover those positions). Money is leaving rather than entering the market. The action is considered bearish because the uptrend will probably run out of steam once the necessary short covering has been completed.” (Technical Analysis of the Futures Markets, John J. Murphy, 1986 ed., pg. 193).
Given these tells, it seems King Corn may be bluffing heading into harvest while Sir Soybean looks to be holding a full house. Given that, one might consider holding soybeans and folding corn, knowingly betting against what we normally keep. Wouldn’t that be an appropriate way to close out this unbelievable year, when the best we can hope for is to die in our sleep?
Until next time,