The bullishness in the grain markets has been extinguished for now.
While U.S. farmers have faced challenges from both drought and downpours, the world’s largest corn and soybean producing nation is still expected to collect bigger-than-expected harvests, a government report showed Thursday. That will buoy world inventories as bumper crops along the Black Sea keep wheat supplies rising, too.
Grain volatility surged this summer amid shifts in the weather outlook, and prices moved up and down with the rain forecasts. Thursday’s report seemed to put the bears firmly back in charge as the Bloomberg Agricultural Subindex fell the most in two years. Traders positioned for more losses by dumping bullish corn and soybean call options.
“The market had the perspective that things were going to tighten up for a lot of these balance sheets, and they really haven’t,” said Alex Norton, risk management director at Beeson & Associates in Crestwood, Kentucky. “It kind of sets the tone that it’s going to be more difficult to rally. We’re building off a base of a good crop situation.”
Some U.S. states faced too much rain at the start of the season, while others grappled with dryness later on. Even as major growing states such as Iowa and Illinois may see smaller harvests because of weather damage, less-prominent corn-producers, from Pennsylvania to Mississippi, could have record yields, the U.S. Department of Agriculture’s latest forecasts show.
American farmers will produce 14.2 billion bushels of corn and 4.38 billion bushels of soybeans this year, the USDA said on Thursday. The figures marked the agency’s first field-based outlook for 2017, and they surpassed all estimates in a Bloomberg survey of analysts ahead of the report. Spring-wheat and cotton harvests may also top expectations, the agency said.
The data sent grain markets crashing, with December corn futures in Chicago dropping to the lowest in almost a year. Wheat and soybeans traded at the lowest in more than a month. The Bloomberg Agricultural Subindex -- which tracks nine components -- fell 3.4 percent, the most since Aug. 12, 2015.
Grain prices have stayed depressed for years because of global gluts. As this summer’s U.S. weather woes raised yield concerns, some crop bulls were starting to become hopeful that the markets would rebound. Hedge funds became net-bullish on wheat in early July and turned positive on corn later in the month. Now, it’s looking like the optimism could be short lived.
The larger-than-expected U.S. harvests boosted world inventories of corn and soybeans above expectations. Growing wheat stockpiles also surprised the markets, as the USDA increased its production forecasts for Russia, Ukraine and Kazakhstan versus the prior month.
Shares of Deere & Co., the world’s largest manufacturer of agricultural machinery, fell as much as 3.5 percent. Meanwhile, there were gains for meat companies including Sanderson Farms Inc. and Pilgrim’s Pride Corp., which benefit from cheap grain to feed animals.
"A big bearish surprise from the USDA," Mike McGlone, a Bloomberg Intelligence commodities strategist, said. "Virtually all estimates for yields, production and ending stocks were better than expected."