I both love and hate the start of the actual production season here in the US. It is full of promise and opportunity, but it is also full of anxiety and worry. The difference between a good year and a bad year can boil down to a few inches of well-timed rain or lack thereof.
What ended up being one of the driest Mays on record has quietly snuck up on some, as we went from praying it would stop raining and warm up long enough to get the crop planted, to now refreshing weather forecasts throughout the hour hoping for signs of a cool down and an addition of rain to the outlooks.
Rain makes grain isn’t just a cute saying, it is a reality. And while in some areas throughout the country there is irrigation to help provide support in times of dryness, this is more of an exception overall than a norm.
One of the things I hate most about this time of year is the hyperbolic attitude of many when it comes to yield adjustments at the first sign of adverse weather. Many times, the first comparison is to 2012, where we lost 27% of overall corn production from the initial May estimates. That summer’s weather was marked by exceptional heat and dryness, fed by a deep drought in the Southeast, that made it even more difficult to break.
Many meteorologists say there are limited weather comparisons between this year and that one, both from an oceanic and atmospheric standpoint. Well-followed forecasters continue to claim the pattern should soon shift back to a more active one, with many of the weather model ensembles agreeing, but that provides little comfort when farmers and traders are looking at parched fields and another dry ten-day forecast.
The dry weather and worry over yield potential has happened to coincide with a more confident outside investor as well. We do not have to worry about default for another couple of years, the American consumer and economy remains resilient, and we’ve made it weeks without news of a bank failure. After having seen the speculator crowd cut their length and move to an overall short position, there is plenty to fuel a nice rally, with us seeing a great close Friday to finish out last week.
You will not see me spend much time this year guessing when it comes to yield reductions and potential. I feel trying to guess the national yield is something with far too many intricacies and nuances to just toss a number out with limited support to the hypothesis beyond ‘it’s drier than normal’ or pointing to a drought map.
Believe me, I am not undercutting the dryness concerns in the least, they are valid, and the rains that are currently promised by private forecasters for next weekend are make or break, both for the weather pattern overall and for the crop. When I sit down to write this column next week, my attitude could be very different.
In addition to closely watching the weather and what that may mean for overall production potential, I continue to watch what is happening in the world cash market with amazement, as physical supplies seemingly continue to overwhelm demand.
One of the situations on my radar is the battle we are seeing in Central China to get the wheat crop harvested in the face of much above normal precipitation. Heavy rain on wheat when it is ready to be harvested leads to sprouting, where the wheat head basically germinates in the field. It is a far from ideal situation, but I feel it is important to note that the wheat has not been destroyed entirely.
Flour made with sprouted wheat produces an inferior final product when it is baked, therefore it is better used for feed than for human consumption in many cases. Concerns over possible toxins and mold can reduce the usage of damaged wheat for feed, but as many in the physical grain trade like to say, “the solution to pollution is dilution,” meaning you can take enough good to mix with the bad to make it usable again eventually, in most cases. The most important factor for now is for locals to get the wheat dry to stop damage, something that remains in question as more rain appears in the local forecast.
For now, the unknowns regarding the extent of the damage, the future of the cash market in the region affected and just how much wheat will need to be brought in from outside sources should support the local market in a big way. This is something that will be welcomed by local farmers after cash wheat prices in the area had fallen for nearly 4 months in a row prior to the production issue.
Looking at the global cash wheat market, we are seeing an interesting development where an abundance of old crop continues to keep a lid on prices. There are reports that Russian wheat is $225/tonne or around $6.00 a bushel, though questions over freight and other factors make the actual price landed a bit more difficult to ascertain. Larger than normal carryover of wheat throughout Russia and into Europe is concerning as we are just weeks away from harvest and another influx of available supplies, likely to weigh even further on cash values.
Wheat has a higher level of protein and fiber than corn, keeping it elevated cost-wise versus corn traditionally. However, with the abundance of old crop supplies, and the increase in available feed wheat supplies, we are seeing the amount of wheat being used for feed increase. This has had an impact on corn and soybean meal demand, especially in China where the amount of wheat being used for feed had been on the uptick even before recent crop damage.
Wheat becoming plentiful and cheap in the global market has been just one of the factors at play when it comes to reduced demand for corn and soybeans. We are also continuing to watch competition out of South America. Argentina’s need for cash has prompted them to look at ways to possibly incentivize corn exports in the months ahead. While in Brazil another record corn crop is expected, with production potential thought to be around 15 million metric tons (590 million bushels) higher than last year.
While we are still a handful of weeks away from hitting peak second crop corn harvest, how exactly Brazilian farmers and cooperatives manage what appears to be a 50 million metric ton (1.97 billion bushels) storage shortfall remains to be seen.
Meanwhile here in the US, export pace for old crop beans and corn remains depressing, as our offers into the world market remain head and shoulders above the competition. We have 300 million bushels of corn sold, but not yet shipped, with another 272 million bushels needing to be sold to meet USDA projections and 3 months to do it. The number of soybeans sold but not yet shipped remains historically low, which is a great sign, but we have 143 million bushels left to sell, which appears may be difficult to accomplish with Brazilian beans over $1.35 cheaper than US values for summer movement.
Looking at industrial demand, we have an interesting development in corn happening, where it is not the market that is limiting ethanol demand, but infrastructure, as we see several plants across the country struggle to run at capacity. Margins remaining strong and gasoline demand remaining resilient will keep ethanol demand a bright spot, though the infrastructure issues will likely keep us from meeting USDA projections this crop year unfortunately.
But as I discussed here, corn has a tendency to make a nice run in the summer months on the back of production worries and this year will be no different until rain shows up in the forecast.
This week will be an interesting one, with rising emotions and increasing volatility only adding to the excitement. Weather will be our main factor to watch, with markets likely reacting to each model update. We will also get a new USDA supply and demand outlook on Friday providing the proverbial cherry on top.
We’ll look at the USDA numbers, whether or not it rained, and what it all could mean for new crop ending stocks next week. As always, don’t hesitate to reach out with any questions! I am here to help.
More Grain News from Barchart
- Wheat Futures Rally on Friday
- Soymeal Missed Out on Friday Rally
- Double Digit Friday Gains in Corn
- Coffee Posts Moderate Losses as Costa Rican Coffee Exports Jump
