Each crop year comes with its own set of milestones. We start with the USDA Outlook Forum projections in February, followed by March acreage intentions, initial supply and demand projections released in May, with the June acreage figure really proving to be one of the last pieces of data released still capable of truly surprising the market.
The June report from the USDA has had its share of surprises over the years. Many of those have been driven by quarterly stocks. Quarterly stocks this year held little in the way of surprises, corn supplies came in slightly lower than traders were anticipating, indicating a likely increase in feed and residual will help to offset a needed reduction in the export outlook. Wheat and soybean stocks came in slightly below expectations, but not out of line from where they should be with the current supply and demand profile.
The big surprise in Friday’s report was corn and soybeans both seeing a significant shift in plantings from March intentions, with both crops seeing a big change in potential ending stocks as a result.
Looking at corn first, planted acreage came in higher than traders were expecting, coming in 2.1 million acres higher than March intentions at 94.1 million acres. This would be one of the highest amounts of corn planted in the United States on record.
Leaving all other factors in the supply and demand outlook unchanged, the increase in acreage would result in a 398 million bushel increase in carryout, or, breaking it down in a bushel per acre standpoint when talking about yield reductions due to June weather, it gave us an additional 4.6 bushel per acre national yield loss cushion.
Of course, all other factors will not remain constant, with the demand profile likely still overstated by upwards of 500 million bushels in the new crop outlook.
I’m still working to wrap my mind around what the adjustment in soybean acreage means going forward. The drop in planted soybean acreage from March intentions was the second largest in the last 33 years, trailing only 2019. The 4.2 million acre drop in soybean plantings would result in a 218.4 million bushel reduction in production potential right of the top, without any adjustment to yield.
This drop in production, with all other factors left unchanged, would take carryout to 121 million bushels, down again to rationing levels, at a record high yield.
The wheat numbers held little in the way of surprises, with slightly less abandonment than expected, and harvested acres up slightly from the last supply and demand outlook. Taking into consideration the increase in harvested acres from the last report, if all other factors are left unchanged, we would see wheat ending stocks increase by 100 million bushels from the June outlook.
So, what does it all mean going forward? Of course, a lot will hinge on what weather does to finish out the growing season. For the sake of my sanity, ease of the exercise and because it is what weather forecasts point to so far, we’re going to say July weather progresses as normal.
Normal July weather will help moderate the need for risk premiums, letting the physical trade around the globe become a bigger driver in market direction, also, likely removing some of the volatility in price once traders finish reacting to Friday’s numbers.
Looking at global trade, there are a couple factors of interest I am watching. Chinese corn traders are reportedly becoming more engaged when it comes to August corn purchases out of Brazil, according to Agrinvest, a Brazilian trading and analytical group. Buyers have been mostly uninterested the last handful of months, waiting for cheaper values and having limited need for corn imports. Heat has been on the increase across Northern China, this combined with a lack of moisture has started to stress young plants, with worries it could continue as heat and dryness remains in place in some areas over the next two weeks. China has been quiet on the corn purchasing front after their springtime run on US corn before subsequent cancellations trimmed overall purchases.
Supplies of feed wheat on the world scale remain plentiful, but industrial margins, especially when it comes to starch production have been improving in China recently, helping bolster short term corn demand. Second crop harvest in Brazil is just getting started, with what is likely to be some very interesting cash market scenarios developing as world demand remains mostly tepid, supplies remain plentiful so far and Brazil is incredibly short on available storage space.
When it comes to soybean demand going forward, it is likely we will see a significant amount of what was lost in production potential from Friday’s report offset by a reduction in export demand. It is hard to ignore that we still have approximately 3.2 million metric tons (117.6 million bushels) of beans sold that still must ship, of which, 1.4 million metric tons (51 million bushels) is owned by ‘unknown.’
We also have 2.1 million metric tons (77 million bushels) left to sell to meet June export demand projections from the USDA, with Brazilian beans currently trading around $1.17 lower than US offers out of the Gulf and that spread is unlikely to come together anytime soon.
When it comes to new crop, export sales are currently running 10.146 million metric tons (372 million bushels) behind the amount sold last year at this time, remaining at some of the lowest sales volumes seen since the trade war. Brazilian beans are cheaper for August/September shipment than US beans are for Oct/Nov/Dec, but quality differences will likely cover a large amount of the premium we will see paid.
As indicated by the export sales total, buying interest for new crop remains limited, with Brazilian exporters significantly undercutting US offers as early as next March.
Demand of course, really will only mean something if we have normal production. August is when beans are made here in the US, leaving us with 8 weeks of weather worries to trade. With El Nino increasing the risk of a dry start to the planting season in Brazil, there is absolutely nothing that is a slam dunk at this point.
When all is said and done, Friday’s numbers increased the need for a risk premium in beans, but didn’t make the balance sheet unsolvable—of course, that is barring a production problem in either hemisphere.
At the same time, it reduced the need for a risk premium further in corn, as it provided more padding to the supply side, helping to offset some of the already realized yield loss.
There will likely be a lot of talk about price ratios in the weeks ahead, and how beans should trade in relation to corn. Ratios mean nothing here in my opinion, as the underlying fundamental factors in each commodity are so different and there is nothing price can do to really change that here in the short term.
Weather will remain the driver as the dust settles, with the National Weather Service calling for a significant decrease in the amount of the Corn Belt experiencing drought as we work through July. Multiple storm systems look poised to make their way across the heart of the country over the next couple of weeks. A risk the pattern flips back to dry remains present at the end of the month, but confidence in extended forecasts remains low.
As always, don’t hesitate to reach out if you have any questions. Have a great week!
More Grain News from Barchart
- Wheat Fades Red for the Day
- Soy Futures Rally Sharply On Acreage Cut
- Corn Futures Flipped Net Red for the Month
- Cocoa Prices Rally to New 7-1/2 Year High on Supply Concerns
