The USDA updated their supply and demand projections on Friday, updating their yield expectations and adjusting ending stocks. The report itself was relatively benign, with ending stocks coming in as expected for the most part. Some may argue the USDA numbers are pointless, but they provide the most in-depth framework when it comes to domestic and global supply and demand, and they are what the market trades.
The August report always carries a certain level of importance with it, as it is the first supply and demand outlook put together using yield data provided by NASS. From May through July, the World Ag Outlook Board is responsible for yield estimates, using trendline yields and making limited adjustments without extenuating circumstances.
NASS providing their yield estimates derived from statistical data is just one more step in the long process of determining the true supply and demand picture, continuing to help us turn more unknowns into knowns as the year progresses.
There are so many moving parts in each commodity it’s hard to do them justice in a breakdown quickly, so today we are going to focus on corn and the fundamental developments I am watching this week and beyond.
I really hate to say it this way, but I’m going to be blunt, corn has the worst fundamental outlook of the three major markets. Of course, if you have been paying attention this isn’t news. The USDA adjusted old crop carryout higher on Friday on the back of lower exports and higher imports. They also adjusted yield expectations 2.4 bushels lower, thanks to NASS data derived from farmer surveys and satellite information. At 175.1 bushels per acre, yield came in slightly below the average trade guess.
The increase in old crop carryout was offset by the reduction in production, with slightly lower corn exports helping pad some of the crop loss. In the end, new crop corn carryout in the US is expected to be 2.2 billion bushels, with its stocks to use ratio remaining elevated, at just over 15%.
When looking at the other factors influencing corn trade as we move ahead, you cannot ignore the situation in Brazil. Silo bags and temporary storage are reportedly being employed as on-farm and commercial space fills up and the country cannot possibly keep up with the pace of exports needed to keep the pipeline from becoming clogged.
The situation in Brazil is interesting in several ways, one of the biggest being how the farmer markets their grain and how bushels are sometimes turned into cash. I held a webinar a couple weeks ago with an amazing cash brokerage firm out of Brazil, Agrinvest and discussed the situation. You can watch that conversation here.
The long story short version of what is happening in Brazil breaks down like this, production capacity has far outpaced storage capacity, putting producers and commercials who handle grain in the country in a precarious position. There is a bit more flexibility or time when it comes to finding a home for the bushels currently being harvested than you may see elsewhere, as the rainy season is not likely to get underway for the next 6-8 weeks. However, the grain needs to be dried and stored properly to avoid spoilage.
We saw a similar situation unfold in soybeans earlier this year that resulted in record or near record low basis levels paid to the Brazilian farmer. There are some issues with the necessary transition from the country’s soybean to corn export program as well, likely to exacerbate the situation and slow the start to the country’s corn shipments.
How the potentially slower than anticipated start will impact global corn trade hinges almost entirely on Chinese import demand.
Reports of damage to Chinese crops by flooding this week have been widespread, with traders talking up the potential for big import needs soon. There are some questions over the extent of the crop lost, with some saying the worries are overblown. However, traders in Brazil have commented that Chinese buying interest has been on an uptick over the last couple weeks, driven by production worries and improving import margins. This is a positive sign after China purchased a decent chunk of US corn earlier this year, before cancelling a large portion of it and going silent soon after. The depth of China’s corn demand and how quickly they want to source the bushels could have a major impact on US corn values, if we were to find there was urgency. However, there is approximately 30 million metric tons of cheaper Brazilian corn available October forward, if they are patient. This not to mention Argentina’s recent push to turn bushels of corn into US dollars.
Argentina’s troubles with money and the reduction in soybean production prompted officials to announce a Maiz Dollar at the start of the month. Like we saw with the Soy Dollar, an artificial exchange rate is paid to the farmer when they sell, increasing the value of the bushels being sold. Argentina farmers have been big sellers the first two weeks of the program, selling well over 4 million metric tons of corn so far.
How that translates to exports directly remains to be seen, with the government granting more leniency in time allowed for shipments, with cash prices out of Argentina currently some of the cheapest in the world.
Ukrainian corn supplies from last harvest have mostly been shipped, making the situation in the Black Sea somewhat of a non-issue for corn in the short-term. However, Ukrainian analysts and producers believe the country is on track to produce another large crop despite the war, making a resolution in the Black Sea important if they want to compete in the global market.
It has been interesting to see Russia hold off on further attacks on port infrastructure since Ukraine took their Black Sea strategy up a notch. Russia needs the Black Sea for exports more than Ukraine, making Ukraine’s willingness to attack seaports and Russian ships potentially more detrimental to the Russian economy than Ukraine’s.
I will dig deeper into the soybean and wheat outlooks in the coming weeks as well, as both have their own set of interesting cash dynamics. Chinese bean buying has increased recently on the back of strong crush margins. Some are bullish exports because of this recent uptick in demand, but that feels dangerous, considering we are still lagging last year’s export pace in a big way.
The wheat situation is a novel, and one that will be fun to dive into as it appears the world may find itself somewhat short on milling quality wheat. While this is a situation that should have a limited impact on futures markets as it is more of a cash play through basis, it could create some interesting bedfellows in trade.
In the end, no one knows exactly how the year ahead will play out, but we’re getting a better feel for direction each week as the supply side of the equation becomes clearer.
Things I’m watching this week to get a gauge on futures direction:
-Any additional tenders by the GASC for wheat and their results
-Any progress on Black Sea negotiations and how Ukraine’s “Humanitarian Corridor” plays out
-Updated weather, do we see a hot and dry finish? How much will it matter?
-On the back of weather, will the shipping situation out of the Gulf improve or worsen? Hot and dry is not great for Gulf exports.
-Ocean freight values/export terminal basis values in the US
-Brazilian cash values
-Export inspections on Monday, sales on Thursday
As always, don’t hesitate to reach out 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.
