The USDA gave us their monthly supply and demand update on Friday, with little in the way of surprises. Historically, June is a month of limited changes as it is too early in the growing season to have deep conviction about yield potential without some type of extenuating circumstances. Much the same can be said about demand projections, with the quarterly stocks update at the end of the month considered to be more of a reconciliation of estimates as we work into the last quarter of the marketing year.
True to form, the adjustments made Friday were small, with old crop corn carryout bumped 35 million bushels on the back of a 15 million bushel import reduction and a 50 million bushel reduction in exports. The old crop change carried over into new crop, with no other changes to the outlook seen, pushing new crop corn carryout to 2.257 billion bushels, up 805 million bushels year over year.
Soybean changes were limited as well, with old crop exports reduced by 15 million bushels and carryout bumped to 230 million bushels from 215 a month ago. That was also attached directly to new crop carryout with no other changes made, taking updated ending stocks to 350 million bushels.
Wheat adjustments were also minor as we start the new crop year, with a slight bump in yield expectations adding 6 million bushels to production estimates that went directly to carryout.
Now that the June numbers are out of the way, we have a few different developments taking place in the market to keep an eye on. Of course, weather will dominate the attention of traders and farmers, as the driest parts of the Corn Belt are seeing their first solid chances of rain in weeks.
Models have struggled with the initiation of the much promised pattern shift, as the incredibly dry conditions have made a transition to more moisture more difficult to accomplish. Some of the drier areas of the Corn Belt saw their million dollar rains over the weekend, while others unfortunately were missed. The question now becomes whether chances of rain remain present enough in the forecast to give the dry areas potential at seeing moisture, or if the pattern shifts back to more dryness like what we just experienced.
As I mentioned last week, this time of year is my least favorite as it feels like uncertainty and subsequent emotions are near their peak, with this year being no different. One of the exercises I like to do to combat some of this emotion—or in the case of the last two years, give my anxiety a jumpstart—is run through supply and demand outlooks.
When running through this exercise on my own I like to compare current outlooks versus a variety of different scenarios, with just about anything on the table. For ease today, we will work with a handful of constants to keep us from getting too far into the weeds. First, we will leave beginning stocks as they are currently projected. Personally, I feel the risk is there we see an increase in old crop ending stocks for both corn and beans, but until we get updated stocks figures at the end of the month, I will yield to the risk we see a reduction in available supplies.
I will also keep acreage projections unchanged. There is a risk we could see a shift in acreage figures at the end of June with a survey-based update from NASS, but I’m not going to try to guess what that could be, because I would likely be wrong.
Looking at corn in particular today, I put together 4 different outlooks. We can all basically agree the likelihood of us nailing trend on the nose is low so I went with slightly above at 183, what I feel is more likely at 178, the potential we tie with a year ago at 173, and then what would happen if we saw an 11% drop in yield from USDA trend, falling to a 163 on the year.
Of course, trade adjusting to these potential yield outlooks would have an impact on price and a subsequent impact on demand, so I adjusted potential as such. Here’s what I’ve found:
As I said, each adjustment to yield potential would have an impact on pricing outlooks and a subsequent impact on demand. In the case of the biggest yield drop I simply kept year over year demand unchanged.
Of course, the reality of how the market trades would be far more volatile if yield reductions were to be seen as deep as the 173 or 163 shown here. Demand adjustments have the tendency to be much slower than adjustments to production, but with the USDA anticipating a sharp 805 million bushel increase in demand year over year, there is room for error in this year’s corn production—at least right now.
Obviously, I don’t show this to depress my reading audience, but to instead show why the market may feel slow to react to current dryness. In addition, it helps to explain some of the massive inverse we are seeing between old crop and new. We are in a somewhat unprecedented circumstance, with a major transition in the global grain market underway to a certain extent. We are still watching what is happening in the Brazilian cash market as the country is set to harvest what appears to be a record Safrinha corn crop after their record bean crop. Storage space remains at an incredible premium, with cash traders in the country estimating over 2 billion bushels of freshly harvested corn will struggle to find a home.
The world end user is aware of this situation and is comfortable enough with supplies on hand at this point they too remain completely disengaged. Even our biggest customers are slow to look at booking any further old crop bushels, with Mexico cancelling a new crop purchase this week.
This transition will not be without surprises. Even with Brazilian beans trading over $1.35 less than US offers, we are hearing of some interesting developments in the cash bean market. According to insiders there is an apparent arbitrage happening that is allowing for the export of US old crop soybeans to Europe with traders bringing soyoil back. I will not even attempt to embarrass myself by trying to explain how exactly that works, but I will say this, in physical commodities, where there is a will and a margin, traders will find a way.
Looking ahead, we will of course continue to watch weather, but outside of whether it rains or not we will be watching what is happening in the cash market. Here in the US end users are rolling their bids to the August in beans or to the September in corn. Some have been nice enough to cover the loss in inverted futures with basis appreciation, while others who have less to buy, are not providing the same.
We will get a updated inflation data this week as well, with the Fed decision potentially influencing how speculators decide to approach this market into the end of June.
As always, let me know if you have any questions! Have a great week.
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
