Ditsch Quantum Trading — July Review

Ag markets broke sharply in June. They recovered essentially all of that break in July.

Our returns in July were negative, but could have been worse given the extent of the rally. We lost less in July than we made in June, even though markets rallied more in July than they declined in June.

Our models did a nice job forecasting the break in June. They were more mixed on the July rally, but still did a nice job limiting the amount of money we gave back. As a result, our combined June/July returns remained positive.

Several factors contributed to the July rally. First, US cash markets firmed from historically weak levels back toward delivery equivalent, pushing nearby spreads from virtually full carry into inverses. Second, weather shifted. May and June weather was generally quite favorable. July featured periods of significant heat accompanied by below-normal rainfall across many growing areas. Third, China returned to the US market and now seems poised to fulfill its quasi-committed 25 MMT US soybean agreement. This one-two-three combination pushed markets back toward their annual highs.

Late in July, and now into early August, weather has shifted again.

August weather, and forecasts that extend well into the month, suggest normal to above-normal rainfall across much of the US soybean belt. I've always believed it's difficult to deviate far from trend soybean yields before August because the soybean crop is ultimately made during August and the first half of September—except in extreme weather cases.

Now we're finally reaching the point where above-trend yields deserve legitimate discussion.

Back in June, the conversation centered around the possibility of a 50-51 bpa national soybean yield and a 178-179 bpa national corn yield. Today, I'm hearing increasing chatter about 55 bpa soybean yields and 185 bpa corn yields. I still think both conversations got a bit ahead of themselves. But if August weather verifies, the risk is gradually shifting toward the upside, especially for soybeans. I'm not quite ready to move away from a trend-type soybean yield of 53.0 bpa, but the skew is beginning to change.

Corn is a bit different because July weather is generally more important for corn than soybeans. As a result, soybean yields could ultimately exceed trend by more than corn does.

Acreage also deserves attention ahead of the August WASDE. My research suggests that the March planting intentions acreage pie was simply too small across all major crops. Planting conditions appeared to favor corn over soybeans because weather was generally favorable during planting, but I still wouldn't be surprised if USDA ultimately adds roughly three million total planted acres, including approximately one million soybean acres, perhaps 1.5-2.0 million corn acres, and a small amount to minor crops. Will we get all of that in August? My guess is no, but I do think we'll get part of it.

So, acreage and yield both point toward the possibility of larger US corn and soybean production than USDA currently projects.

Now let's talk demand.

World demand for corn and soybeans remains solid. The difference today versus a month ago is that USDA is already forecasting fairly aggressive export demand. In other words, while demand continues to impress, much of that is already reflected in their balance sheets.

The story isn't simply "bigger crop." It's becoming "bigger crop, but better demand."

That said, it may be difficult to push demand estimates materially higher from here given ample world supplies.

Thus, I believe markets have behaved relatively rationally over the past week. Better weather continues to remove some of the risk premium from the market. If forecasts verify, I could see November soybeans working back toward the $11.00-$11.50 range and December corn back toward the $4.25-$4.50 range.

Pushing much below those levels may prove a bit more difficult.