As I write this, snow is falling in central Iowa well ahead of its normal schedule. It seems the weather is akin to markets where sleepy markets are coming alive and what used to be dynamic is mellowing. Nothing is "normal" and that is OK.
The grain market is the poster child of this transition from bland to spicy. I suspect the USDA is a touch out of step with their price projections as the dynamics are moving quicker than their reported value.
Let's frame this one a bit. First, we are not running out of corn in the United States; we are just going to be a bit compressed on inventories relative to where we thought we were going to be. The impact of the dry August and the winds will take some acres and production out of the equation. We will have enough stocks to make it to the next harvest. The bigger question, in my opinion, is the displacement of the crop relative to the demand. The eastern side of the Mississippi River has fared much better this season relative to the west which will create a bit of a conundrum. Grain generally flows west to east, so if we have production shortfall in the Indiana/Ohio region, the routine movement can provide relief.
Basis is generally stronger in the east (hence, the normal movement) and the relationships will be exacerbated in the event of troubles in that area. It is when we have production difficulty in the west that things get tricky and that is exactly where we find ourselves. In these scenarios, it is not the CME that should garner your attention, it is basis.
Take a peek at the map below that depicts month-over-month change in basis. Green numbers are tightening basis and are "bad" for users of grain, "good" for the corn producer. These data tell the story — basis has gotten firmer through the heart of harvest.
The second chart depicts basis in absolute terms and demonstrates what I was referencing earlier — a flattening of values east versus west; this would normally be much more pronounced.
I share this information on corn to establish a platform of what is really going on. The whole game is being played out currently in the soybean complex and I suspect corn will follow soy's lead — up or down — for the next few months. To be sure, the domestic balance sheet has been tightened to a point where we have to pay attention; anything less than a 300-million-bushel carryout has to be recognized for its merits.
The soy scenario has less to do with east-versus-west basis and has everything to do with South American production. There has been no irreparable damage to the overall yield prospects in Brazil or Argentina, the timing of the crop has been dictated and that is what we are feeling right now. Normally, we would anticipate South America to firmly take over the supply-the-world mantle in February and carry that title until the U.S. harvest in the fall. The lack of early progress likely means that the United States will have to stretch supplies to the importing world, mainly China, deeper into the year than what is comfortable for us. That discomfort is what the CME board is trying to make you feel.
Crying over the lack of soybean meal coverage at the $285 level is a genuine regret and it does nothing to make you a proactive participant and preventing $400 soybean meal being fed yet this year. Almost every good bull market is characterized by an inverse, whereas the nearby contract carries a premium to the back. That is the situation with soybeans and soybean meal. Soybean oil is relatively flat. This market is telling us a story if we can be still enough to listen.
Where are the pigs? The 180-plus pound category inventory from the September Hogs and Pigs Report has been exhausted without the animal count indicated by the USDA. This perspective was felt by many market participants who expressed reluctance in digesting the values as presented. It would seem to us that this trend (fewer market-ready pigs than the report implies) will be with us through the end of the calendar year. The geographical displacement of the inventory, with the East Coast still heavy with inventory while the heart of the nation is more current, looks to be the bigger story. Similar to grain, hogs want to follow their normal basis flows and physically moving animals from the Carolinas to the Midwest is an expensive proposition that is met with logistical challenges.
Look for the December futures to take ownership of the spread now that October is off the board. Inverting the December/February is a statement of the same phenomena as in the grains — all bull markets love a counter-seasonal inverse.
In closing, remember that Nov. 9 will mark the first trading day of the CME's cutout contract. We, as a production industry, have a vested interest in the success of this contract.