• HEADLINES: Chicago recovers as rumours abound that China has purchased US old crop corn; Record $1.50/bu margins for US ethanol producers in December.

• Chicago futures fell to sharp losses in early day trade on leftover liquidation of stale long positions in corn/soybeans. July corn tested $6.00 and December corn reached $5.00 before active commercial buying emerged. That end user buying has rallied corn/soybean futures sharply off the morning lows. July soybean and July corn futures are higher at midday on firming cash basis levels and talk that the break produced new importer interest. It appears that corn/soybean futures scored their seasonal lows on panic fund selling.

• We mentioned yesterday that China’s private feed users may cancel a modest number of US old crop corn purchases (600,000 mt or less), but that China’s state buyers of COFCO/Sinograin would continue shipping their record old crop purchases that stand at 10 million mt. Bloomberg reported a like story this morning, but we hear that China’s state buyers are willing to take any corn that feed users would like to cancel. China appears to be consolidating its corn/ wheat purchasing at government level. China still must issue 7.2 million mt of corn and 9.6 million mt of wheat TRQ import licenses that are duty free. Chicago traders will find that China bought a record or near record amount of US corn last week that will be reported in this week’s FAS weekly export sales report.

• China is checking October-November US Gulf soybean offers and will be starting a new crop purchase program shortly. China is importing record tonnages of South American soybeans, but they will soon need to shift their demand over to the US Gulf from October onward.

• Let us not forget that China has an acute import need for corn/soybeans amid their expanding livestock herd and tight carry-in feed stocks. We believe that China will import a record 30-35 million mt of world corn in 2021/22, well above the USDA forecast of 26 million mt. China is rumoured to have bought 1.0 million mt of US July/August crop corn on the break this morning.

• Chicago brokers estimate that funds have sold 12-15,000 contracts of corn, 4-5,000 contracts of wheat, and 1,000 contracts of soybeans. In soy products, funds have sold 2,000 contracts of meal and 2,200 contracts of soyoil through midday.

• The US produced 294 million gallons of ethanol in the week ending Tuesday, up 38% from last year but down 5% on 2019. The production rate was well above the pace needed to reach the USDA forecast for 2021/22. US ethanol stocks fell to just 797 million gallons, down 18% from last year. This is the lowest stock/use ratio for US ethanol in the middle of May since 2011, when records started to be kept. Importantly, US consumers used 9.48 million gallons of gasoline, 1% above 2019 and 38% above 2020.

• We calculate that December US ethanol margin stands at a record $1.50/bu. US ethanol firms should be locking in this margin by selling ethanol and securing corn futures. Such a margin with corn at $5.00/bu seems impossible, but lack of small refinery waivers will push US 2021/22 corn grind rate to 5,400 million bu plus. A real demand story is being built for US ethanol in 2021/22.

• The midday GFS weather forecast targets the harvest areas of Texas/Oklahoma and Nebraska with 1-3.00″ of rainfall. Midwest rainfall will be more widely scattered with totals of 0.25-1.50″ and coverage of about 50%. The Dakotas and upper third of the Midwest will hold in a dry weather trend with just a few light showers in Eastern South Dakota and SE North Dakota. The Western US holds in a very dry trend with the drought worsening. High temperatures range from the mid 70’s to the lower 90′s.

• China used the break to add to their old crop corn purchases on the morning break in taking any cancellations from the private sector and securing another 1.0 million mt of US old crop. A seasonal low was likely set this morning. Central US weather cannot get any better if you are a bear. Buy breaks.

• Our early morning commentary included the following:

Chicago corn futures are lower than they were mid-April when the Brazilian winter corn production loss was far less. The decline in world and Chicago ag futures is based upon speculative liquidation. The Chicago price break will act to boost demand at a time of declining old crop supplies and stocks. In addition, the 2021 US growing season is just starting and a major drought across the Dakotas and S Canadian Prairies is of major concern to us. We have to admit to surprise at the speed/depth of the decline since the “top” was forged on May 7. That said, the grain bull is, in our opinion, a multi-year trend and our view remains that a seasonal low (bottom) will form in coming days. This break is an opportunity to fill gaps and extend cover before prices resume their upward momentum.