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Last week I wrote about the mounting concerns in the US Midwest which was enduring one of their driest seasons on record. Photographs of drought-stressed corn and bean crops were being widely circulated on social media. The threat to production was the final catalyst required to shake out the excessively large short (sold) positions held by fund managers and speculative traders.

In the space of a week, corn and bean open interest has gone from short to now being net long (bought) as the trade reassessed their views of the market.  Wheat was not immune either, riding the coattails of corn, with many of the poorly placed sold positions being unwound.  A classic short-covering rally. 

The thing about short-covering rallies is they can be notoriously short-lived.  In the space of a week, CBOT wheat (Dec ’23) has rallied 84ȼ/bushels or roughly $45/t, led by fund managers exiting (buying back) their sold positions. Without further production cuts however, the need to exit these positions will dissipate and the market will again start to trade demand fundamentals, which could be bad news for prices as the US is poorly placed to price in any demand at the moment.

Yesterday, weather forecasts turned wetter in the US with weather models finally starting to find some consensus.  While there are still some holes, key states of Iowa (17% corn total production) and Minnesota (12% total production) look to get a decent shot of moisture in the coming days.  This will be regarded as a “just in time” rain, and while there has been some damage, the majority of crops will have hung on enough to benefit.  Mid to late July will herald the start of corn silking and bean flowering which will ultimately determine final yield.  As the US heads into July, days get longer and hotter.  As biomass increases, so does the requirement for plant-available moisture, meaning the forecasts will need to see more rain if yields are to meet anything close to the trend.

Wheat markets are also starting to focus on some late changes to European production.  A dry May and June has taken some of the shine off crops, with French and German analysts both supporting production cuts in the order of 2-3%.  Russian analyst Sovecon has also cut Russian production from 88mmt to 86.8mmt due to drought-like conditions in the spring wheat areas.  The trade is also coming to grips with the very strong possibility that Russia will actually walk away from the Grain Initiative in mid-July. 

The most recent agreement has been on paper only.  Russia has not supplied inspectors required to rubber-stamp the passage of bulk vessels in and out of the Black Sea. The messages out of Moscow are fairly direct in saying the grain corridor doesn’t need to continue.  The UN has also discussed the issues to meet Russia’s demands on reinstating its agriculture sector to the SWIFT banking system.

Next week

Keep an eye on the US weather for price direction.  One rain event will help, but it is not going to turn the season around without follow-up rains.

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Click on graph to expand

Click on graph to expand

Data sources: Reuters, USDA, SovEcon, Next Level Grain Marketing, Mecardo

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