Corn rallied this week with beans with news of trouble in South America continuing and rumors of purchases from China. As we have mentioned before, China buying all ag products is welcome news as they are well behind the Phase 1 targets. The Russia and Ukraine tension, should it boil over, will have major implications for the commodities market as Ukraine’s exports will all but cease. The news of Brazil stopping bean sales is worrisome as there could be more bean and corn yield lost than thought. Energy prices continue their run higher as ethanol demand does not seem to be slowing down. With corn still below recent highs, unlike soybeans, it would appear there is still room for upward movement, but the trade into the weekend, where anything can happen as we know, will be important.
Via Barchart Soybeans rallied this week as soy oil and meal also rallied. The noise around the problems with South America’s crop got a little louder this week with StoneX reporting that Brazil soybeans have gone to “no offer” due to farmers refusing to sell new-crop supplies in the current environment, with drought losses in the south worse than first believed. South American weather remains mixed as southern Brazil and northern Argentina remain hot and dry while southern Argentina received rain over the last couple of weeks. In early February, all areas are expected to revert back to hot and dry in the forecast. These troubles make it sound like the USDA was off on their South America estimates in last week’s report. This is a situation to monitor as any stoppage of sales from Brazil and Argentina would mean purchases from the U.S.
Equities have had a bad week as tech has led the way lower. These rounds of selloffs will offer opportunities to buy back in at some point but as always, timing the market is not an easy job. The market was so hot last year pullbacks are expected, but it is hard to stomach when it falls this much this fast. We are still above the levels we were right after Thanksgiving, but the volatility of the last couple of months looks to still be hanging around.
The 2021 U.S. grain crop has the potential to be one of the largest on record. Where did all the yield come from, what areas were the hardest hit, and why on God’s green earth are grain prices still so high?
Today, we are joined by several RCM Ag Services grain markets experts from around the country to catch up on a post-harvest update and share an outlook for production and marketing in each of their respective regions for the remainder of the 2021 marketing season and the upcoming 22 crops.
Welcome to the 2022 lumber market. A place no one wants to be, but all keep showing up. Here’s a brief rundown:
The futures market was up over $100 again — The run has been relentless and unforgiving, and it’s hard to find the endpoint. Recently, 4 out of 5 of those in the lumber industry think the market is going higher. Half of those are not long. So why so bullish? The two key factors are transportation and demand. We will look at each side to see if that endpoint can be projected.
Many are looking for the typical first-quarter shipping issues where supplies are bought but can’t ship. That causes an artificial secondary market where the trader is forced to buy anything he can get his hands on from anyone. Here we see a jump in truck orders to “fill in.” This time, trucking availability has been restricted, creating general chaos throughout North America. The fill-in mechanism has broken down, forcing the trader to buy a car for further out shipment regardless of price. This has extended order files at the mills when they typically shrink. It also has pushed prices to the next level.
The bigger surprise coming into 2022 was the amount of demand that continues to create itself. Usually, we could foresee a push coming from the numerous jobs that get bid and rebid. Today most are surprised at the amount of new business that shows up daily. A lot of it is long-term and not close to starting, but it has changed the psyche of the trade and added another level to the already pressured trader. That same trader who can’t buy enough was only yesterday told not to buy a stick. That chase is also pushing prices to the next level.
Let’s Get Technical:
So, what is the next level? On the technical side, the key areas now are the gap left last year at $1,514.80 and an old Fib number of $1,518.30. There is room to get there with a weekly RSI at 75%. Each month is at a new high, and there aren’t any calcs from here up. We know that recently, a market spike has had a corrective pullback. I’m not that confident in a pullback with 3 out of 5 willing to “buy the pullback,” but that has been the trend.
Weekly Round-Up:
The market is back at unsustainable levels. And why do I say that? Because we can only build so many houses, and we do not have the labor to push actual starts to 1.7 or 1.8. At $1,200, there is enough wood flowing to keep a 1.6 pace at least. The market goes to $1,500 or more because there is a significant gap in the chain. Logistic problems have bottled up the flow of needed lumber, and those logistic issues are not going away anytime soon.
The Leonard LumberReport is a new columnthat focuses on the lumber futures market’s highs and lows and everything else in between. Our very own, Brian Leonard, risk analyst, will provide weekly commentary on the industry’s wood product sectors.
Before You Go…
The 2021 U.S. grain crop has the potential to be one of the largest on record. Where did all the yield come from, what areas were the hardest hit, and why on God’s green earth are grain prices still so high?
The USDA report was met with a mixed reaction on Wednesday as markets traded both higher and lower immediately following the report. Thursday brought on large selling though, as rain in the dryer parts of South America took the headlines after the USDA Report ultimately did not provide any major changes. The USDA did not change the U.S. yield for corn as it stayed at 177 BPA while raising total crop size to 15.115 billion bushels and 1.540 billion bushels for ending stocks. World stocks were lowered along with smaller yield numbers expected in South America. The rain will do little to alleviate the stress on the crop as more will be needed before we feel better about less yield loss. Several private estimates believe the Brazil and Argentinian losses are larger than the USDA updated. However, there is still plenty of time before the crop comes out of the ground to rebound.
Soybeans fell on the week for the same reasons as corn. The USDA Report was slightly more bearish for beans as they raised the U.S. yield 0.2 BPA to 51.4. They slightly increased total production and raised U.S. ending stocks by 10 million bushels to 350 million. A good amount was cut from World-ending stocks due to the issues in South America, but the market had already priced that in, if not more so than was reported. Exports were within expectations, so no surprises there. One wild card still out there is that China is $16 billion behind their Phase 1 trade agreement commitments. Obviously, not all of this is soybeans, but they are far off their soybean numbers. It is unlikely the Biden administration will press them to get to their commitments, but if South America’s troubles are worse than expected, they have to go buy them from somewhere.
The Dow fell slightly on the week but bounced back off its lows from Monday. The markets are looking for direction following 4 days of loses straight. With repositioning for the year ahead and profit taking after a historic year the volatility could be around for a while.
Wheat
Wheat has taken it on the chin the last couple of weeks as you can see in the chart below. Wheat sold off following the other markets after the report. The drought in the winter wheat belt is concerning and if it does not improve, we should see prices move higher in the next month or two. The drought is not a big problem right now, but if it continues into February, it would be concerning. This week saw the lowest close in KC Wheat since October.
The 2021 U.S. grain crop has the potential to be one of the largest on record. Where did all the yield come from, what areas were the hardest hit, and why on God’s green earth are grain prices still so high?
Today, we are joined by several RCM Ag Services grain markets experts from around the country to catch up on a post-harvest update and share an outlook for production and marketing in each of their respective regions for the remainder of the 2021 marketing season and the upcoming 22 crops.
It’s hard to believe that this market has reentered the hyperbole dynamic we saw last year when the market lacked any restraint in upward pricing. The market bottomed on November 2nd at $606 and has gone straight up since. On Friday, the March contract made a new high of $1,250. That is a run of over 100% during the holidays. So, what are the issues causing these spikes? First is the massive contraction of this industry, creating a buy pattern that is out of balance. There are fewer players in the pipeline, making it consistently tight. The other is the new two-week to 30-day pricing that keeps everyone in the market almost daily. A quick summary of today’s dynamic is that when demand is good, there is a constant need to buy, and when demand slows, there is no need to buy under the current model. We started with the latter this time.
The need to buy throughout the 3rd quarter dropped nearly 60%. The new model of only buying when needed and only buying an item that will ship caught the market short. The previous models always had a buying program in place as prices fell, and these guys don’t. If the market slowly turns, there should be enough inventory at the mill side to keep costs balanced. As we saw in November, the slowing of production and shipment issues caused a bottleneck overnight. The market now needs to settle to ease the pressure on prices.
Today, the issue in front of the industry is that they bought great at $700 then added to the pile at $1,000 but are still averaged well. The next time they step up to the trough price will be $1,200, which is off their charts for breakeven.
Let’s Get Technical:
This type of market doesn’t relate well to momentum indicators. That said, March made a new contract high at $1,250 with an RSI of 76.70%. There is a lot of room to the upside. The math keeps bringing the value (volume) areas into focus. The two areas are $1,250 and $1,550. A good indicator on the last run was the Fib extensions. Today the 1.38% move in March is $1497. The technicals are building for a push to that level, and there isn’t much pushback from the trade. It will take a lot of energy to get there, so a pullback in some fashion would be efficient at this point of the cycle.
Weekly Round-Up:
You heard it here first… Because of global economics, if this market goes up to the $1,500 level, it will take out the historic highs, and the momentum build-up will be too great to cool. So, there should be minor issues out there of prices going higher. If you asked us if we would buy it today, we’d say, “I wouldn’t buy it with all of Doug’s money.” You can’t discount the ease of producing this commodity. There is no fundamental cause for this commodity to be over $1,000, and we just have an incredibly inefficient marketplace today.
The Leonard LumberReport is a new columnthat focuses on the lumber futures market’s highs and lows and everything else in between. Our very own, Brian Leonard, risk analyst, will provide weekly commentary on the industry’s wood product sectors.
Before You Go…
The 2021 U.S. grain crop has the potential to be one of the largest on record. Where did all the yield come from, what areas were the hardest hit, and why on God’s green earth are grain prices still so high?
Happy New Year! Volatility has been the main storyline in the first week of 2022. There was enough surprise rainfall in the dry areas of South America to spook the markets right before the New Year before a slight bounce. This week’s ethanol production numbers were slightly below last week. Compared to the previous year, monthly ethanol production is running 9% over last year, but ethanol stocks are 8.3% below last year. Ethanol margins are still profitable as gas has rallied since Thanksgiving. The dryness and heat in Southern Brazil and Argentina remain in the forecast while northern Brazil continues to get too much rain. For reference, this time of the year in Argentina is the equivalent to June. If the forecasts prove true in the next couple of weeks, they will continue to stress the crop. Exports this week were nothing to write home about as the USDA described them as the “Marketing year low.” If South America’s crops continue to struggle, we could see an increase in exports, but the opposite could be true if the weather improves.
Soybeans have experienced the same volatility as corn but remain at its highs, as seen in the chart below. The story is the same as corn being driven by weather problems in South America. Barchart estimated Brazilian soybean production at 137 million tonnes, with Argentina production at 45 million tonnes. The last USDA projection had 144 million tonnes in Brazil and 49.5 million tonnes in Argentina, showing that the private sector believes the crop has gotten worse and is trending in the wrong direction. The chart below is interesting because you can see the top at $14 this week and back in July. That will be an important number to close above to keep the momentum going.
The Dow has had quite a volatile week following a week of the Santa Claus rally. The Fed may increase the rate at which they raise rates which worries some investors, but at this point with the Fed, many investors are waiting until they see the plan. As a new year starts, especially following the impressive year that was 2021, many investors try to predict the story for the year ahead. If we have learned to expect anything while Covid is in the markets, we can’t predict much for the year ahead.
The January USDA Report is Tuesday and should be a market mover. All eyes will be on the report as everyone positions themselves ahead. If the volatility of late shows up, it could be a big market mover.
Podcast
The 2021 U.S. grain crop has the potential to be one of the largest on record. Where did all the yield come from, what areas were the hardest hit, and why on God’s green earth are grain prices still so high?
Today, we are joined by several RCM Ag Services grain markets experts from around the country to catch up on a post-harvest update and share an outlook for production and marketing in each of their respective regions for the remainder of the 2021 marketing season and the upcoming 22 crops.
What a year. The housing industry plowed through 2021 with record disruptions and record sales. Once a pipeline issue was resolved, another would pop up. We are coming into 2022 with a tight supply and high demand for this commodity. Big dollars continue to flow into the economy, and now a house has reappeared as a valuable asset. There is also roaring inflation which is a double-edged sword for this commodity.
The fact is the housing market is exceptional, and lumber prices are trending higher. The positives are firmly in place, while the negatives will need a dramatic economic shift to come into play. The black swan could be rates or inflation or a greater covid blitz. In any case, it would have to be dramatic. Let us dive into the key factors controlling this industry. Our gut instinct is to rehash the past, and we’ll attempt not to bring up the obvious.
2021 — Year in Review
We came into 2021 at a futures price of $870. While we saw $1,000 the year before, this was much too high for the industry. The refusal to buy put an industry, seeing increasing volume in construction, critically underbought. From there, a panic ensued, and the market went parabolic.
The biggest takeaway from 2021 is that the trade was willing to pay unheard-of prices for wood and passed along the cost.No price level slows buying, and there is no longer too high. What higher prices do is generate a greater supply at a quicker pace. When there is a disruption in the chain, prices go straight up. Today we are either in the middle of that cycle or near the end.
Many would build a plan around the “bookends” of that year’s trade in the past. This is a critical drill for the industry in 2022. The need is to create a value area. We need to look at some of the economics out there to look at the value of this commodity.
Housing starts average in 2021 was 1.586 million. The consensus is projecting a 1.6 number in 2022. That number could be far greater if there were the ability to build. As we said back in 2018, there is only so much capacity to go around. This year, many builders have chosen to scale back building plans so as not to get overextended. Others are adding numbers with lofty goals. Profitability drives their planning, and with the lack of availability still present, profits will stay high.
Where should value sit at 1.6 million starts?
The cost of production is skyrocketing in this industry as in all the rest. The last report showed wages up 9.2%. Yes, that is correct. That means the person who changes the oil in the logger’s truck to the people who do the final cleaning on the home before closing makes about 10% more. And that is if you can find a person to hire.
In the United States, the average monthly job offerings number is around 6 million — The December 1st number was 11 million. The stat that shows the mood of labor is the “quit” rate. This is usually a sub 1% number, and it was a whopping 3% in November. 3% of workings are quitting. These numbers are unsustainable, but many of these costs will not come off.
The best indicator today of the economic issue is the current inflation rate, and in November, it recorded 6.8% with an upward trajectory.
All this is a result of flooding the system with cash. That is flooding a system that was already building strength, and that was not the case in 2009 when the economy was headed lower. We must remember that many funds are circulating in a small economic space today. At this point, it will have to inflate itself out of the problem, which will end the housing run.
We talked earlier this year about how the housing market reacts to a cash-infused accelerating economy. With a better economy, expectations were for the first-time homebuyers to jump into the market after the “lost decade.” We have seen that increase, but more than expected went to the multi-sector. Under these dynamics, an increase in rates will not cause a slowdown in home buying. The norm has been about 38% of first-timers buying new homes, which is now closer to 20%. The troubling statistic is that the 38% group are investors. We do not need to review what happened the last time it was that high.
Projection:
Usually, most outlooks are a counter-trend analysis. Today we see only roses. This industry is highly complicated because of the various amounts of input at all levels. One factor could be bullish at one point and bearish at another. Today, we have numerous positive inputs that will lead to higher prices. At the same time, those factors have a shelf life. The tightness factors are slowing. Last year once those factors were finished, others crept into the equation. The next correction will indicate if that repeats or not. In the meantime, expect the 2021 swings again. It will also look remarkably familiar to the old-time seasonals that would make a top in the first quarter, do the sell in May and go away for the summer, followed by the fall buy starting the cycle all over again.
2022 will show owning lumber products will be a sound investment. Also, owning some type of downside risk management will soften the blow of the wide swings, especially when it is down. It is no longer a “time the buy” market; it is an opportunistic buy market.
About The Leonard Report
The Leonard LumberReport is a new columnthat focuses on the lumber futures market’s highs and lows and everything else in between. Our very own, Brian Leonard, risk analyst, will provide weekly commentary on the industry’s wood product sectors.
Before You Go…
The 2021 U.S. grain crop has the potential to be one of the largest on record. Where did all the yield come from, what areas were the hardest hit, and why on God’s green earth are grain prices still so high?
Corn continued its rally until it faced some selling on Tuesday. The dip on Tuesday should be expected when a market starts running this hot and people like to take their profits. The South American weather has not changed and remains hot and dry in southern Brazil and Argentina. Northern Brazil may have the opposite problem as they are expected to see heavy rains that could lead to flooding delaying the start of harvest in the region. The weekly ethanol grind was good again this week as we are 17 mbu above the weekly pace needed to meet the USDA’s corn used for ethanol projection. As Americans continue to travel despite the new wave of Omicron, we can expect an increase in corn use in the January USDA update. The air has not been let out of the market, despite what “the sky is falling” people said after Tuesday’s dip, as there is still a lot that can happen in the coming weeks and months.
Soybeans saw a big boost the first trading day after Christmas as the weekend weather did nothing the alleviate the concerns for South America’s production. Beans saw the same profit-taking on Tuesday but are still seeing its best levels since August. The same factors affecting corn in South America have the same effect on soybeans. With inflation looking to continue into 2022, we could see higher values in many commodities along with grains. Rising world vegetable oil prices have helped beans during their run along with wide crush margins. As we said last week, corn and beans seem to be on the same boat for now unless something significant happens. Any unexpected rain to help the crop would probably result in a panic selloff as usual.
The Dow had a good week as we have seen a good rally around Christmas and into the New Year’s holiday. The Omicron variant continues to rip through the U.S. and the world as events are canceled, and restrictions are placed back. With the rate of this new wave spreading, it will be interesting to see how long the rules stay if the virus runs its course faster than usual. The CDC changing the quarantine requirement from 10 to 5 days is also welcome news to the market as it appears we may be getting closer to fewer restrictions across the board and workers getting back quicker. At the close on Wednesday, the Dow is up over 19% for the year (wow!).
Podcast
The 2021 U.S. grain crop has the potential to be one of the largest on record. Where did all the yield come from, what areas were the hardest hit, and why on God’s green earth are grain prices still so high?
Today, we are joined by several RCM Ag Services grain markets experts from around the country to catch up on a post-harvest update and share an outlook for production and marketing in each of their respective regions for the remainder of the 2021 marketing season and the upcoming 22 crops.
It was a quiet holiday-shortened week with the roll being the feature. The market broke $100 and rallied back $60 by the end of the session Thursday. All said the weakness in the market was only via futures, and the cash market held steady or gained for the week.
The Christmas holiday keeps giving. Next week there are more holidays to contend with — that’s why we saw the big push before the Christmas week. The question is if the push was sufficient for a while or not. Surprisingly, the cash market demand remained in place last week, so this thing could be off to the races again once the holidays are over. It looks like the aggressive cash buying is to keep the flow going. That will start to ease at some point, but it’s a positive for today.
Let’s Get Technical:
To keep it simple, the market left a gap last week between 990.20 and 979.30. With another quiet week in front of us, we would look for a test of that area. The one caveat is that lumber is famous for leaving a gap partially filled. If that is the case, the 61.70% RSI gives the market a lot of room to go back to the $1,200 area. There are two possibilities next week. Either it back and fills the gap and then trades sideways, or it off to the races dragging cash up with it.
Weekly Round-Up:
The entire market psyche is one of a trade that is range-bound and manageable. This one isn’t ready for that, and it feels like setting itself up for another run-up. Cash is still king but hedging up here is a must.
The Leonard LumberReport is a new columnthat focuses on the lumber futures market’s highs and lows and everything else in between. Our very own, Brian Leonard, risk analyst, will provide weekly commentary on the industry’s wood product sectors.
Before You Go…
The 2021 U.S. grain crop has the potential to be one of the largest on record. Where did all the yield come from, what areas were the hardest hit, and why on God’s green earth are grain prices still so high?
Since early December, corn has had a great run as South America’s dryness continues and delays planting in some areas. The corn crop is only about 60% planted in Argentina, which is the slowest pace on record for late December. Anything planted after January 10th will probably experience some yield drag. Their planting rate is on par with last year, but the weather has been far dryer and looks to continue going forward. As you can see in the chart below, March corn has rallied 90+ cents since early September. With continued strong basis and raises at prices, farmers have been given a gift but when the farmers choose to claim the gift and how long the gift stays available is another question. If Argentina and Brazil stay dry, this rally could continue, and we could retest the summer’s highs. Ethanol margins shrunk, and crude fell but remain at much higher than average levels, which will also support corn.
Soybeans, like corn, have enjoyed a nice rally as South American weather issues cause some worry. This week, Brazil’s bean crop had its production estimate lowered by 3 million metric tons by Parana’s crop analysis firm, Deral. While Brazil is still on pace to produce a record crop, it is not expected to be as large. They increased planting this year, so a larger crop is expected in Brazil, even with some headwinds. The basis is holding steady around the country for beans as we head into the new year. Beans and corn are likely to move together leading up to the January USDA report.
The Dow had a flat week and a half with volatility due to the Omicron variant having it all over the place with several large down days followed by a good bounce. The Omicron variant’s spread has been worrisome as restrictions start to come back into play in major cities. It will be important to keep an eye on this around the holidays as we also hope to see the “Santa Clause rally.” Senator Manchin also stopped President Biden’s BBB plan as he will not vote to approve it in its current form.
Podcast
Commodity prices have perpetually soared for the past year and continue to trend higher. We’re diving into the fertilizer forecast with a unique guest, Billy Dale Strader, a branch manager for Helena Agri-Enterprises in Russellville, KY., who is truly at the epicenter of the rising fertilizer prices.
Billy Dale planted his agriculture roots on his family-owned farm and has managed regional seed and chemical sales at Helena for the past decade. In this week’s pod, we tackle the big question for farmers and ultimately end-users — is the impact of higher-priced inputs, like seeds, chemicals, and fertilizer, on the supply and demand for the major U.S. crops? Listen or watch to find out!
The best way to recap the market is to look at its tone. To sum it up, we will introduce the 3 “C’s” or confusion, congestion, and consternation. We’ve heard repeatedly, “how could this have happened so fast?” The trade was not looking for an early start to the yearend run. It also believed that there was enough supply. That proved to be incorrect. Most of the supply issues are related to the congestion at transportation points caused by COVID and weather. Things are fluid but at a pace that allows shipping to stay fluid. That is not at a pace to fill in the needs.
This leads us to the third “C,” or consternation. Concern and anxiety about future wood deliveries have trickled back into the marketplace. All have been caught in that nightmare this year and the nightmare that followed. Most are now working towards not being there again in 2022. So, we are ending the year with a more aggressive buy pattern than usual at a time when things are moving slow.
The issue plaguing this industry is its overall weakness in defining value. At $600, 50% of the industry went hand to mouth. At $900, 80% of the industry is hand to mouth. There is no investment in between. The buy-side has to scale into the market as it falls, and that will take the volatility out of the market. Waiting for the bottom is not a business strategy. We think we are seeing more of that today, but after the fact. When everyone owns $1,200, it will be a long way down again. This commodity fits well between $650 and $750.
Let’s Get Technical:
There is a lot of noise between here and 1,000 in January. Trying to gauge the trend during the holidays is fruitless. We’ll say that January futures were up $20 for the week, but the RSI fell 13%. The market is technically very friendly, but trading during the quiet holidays with some big gaps below takes some enthusiasm away from the long side. The Fibonacci points below could be the range to finish out the year:
38% 929.80
50% 1079.00
61.8% 1228.20
Weekly Round-Up:
This push higher had a lot of energy, and in this industry, the earlier the energy, the quicker the end. We think this market needs to cool some for the holidays, but we, including Rick Santelli, Kramer, the Fed, and everyone else, have never been here before. Today the consumer is accepting higher prices as the norm. There isn’t any pushback; builders are paying up, multifamily guys are paying up, homebuyers are paying up. Next year, we have no actual data to track for possible outcomes. Buying futures here could be the best trade of 2022.
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Soybeans rallied this week as soy oil and meal also rallied. The noise around the problems with South America’s crop got a little louder this week with StoneX reporting that Brazil soybeans have gone to “no offer” due to farmers refusing to sell new-crop supplies in the current environment, with drought losses in the south worse than first believed. South American weather remains mixed as southern Brazil and northern Argentina remain hot and dry while southern Argentina received rain over the last couple of weeks. In early February, all areas are expected to revert back to hot and dry in the forecast. These troubles make it sound like the USDA was off on their South America estimates in last week’s report. This is a situation to monitor as any stoppage of sales from Brazil and Argentina would mean purchases from the U.S.
