Weather data shows that the month of June will go down as a record setter across the Corn Belt. June has the Corn Belt on track for 11 straight months of above-normal precipitation. This will also make the last 12 months the wettest for the Corn Belt in the past 125 years. The question now is if these conditions will continue, or we see a complete reversal to drier-than-average conditions.
There are two well-defined opinions forming in the market surrounding recent weather in the Corn Belt. The question is if the recent lack of heat units is negative for production or beneficial as the crops have had limited stress. This also brings into the question on whether recent growing conditions are as negative as we believe given today’s plant genetics.
We are starting to see more attention placed to commodity demand, mainly for corn. In the latest supply and demand report the U.S. Department of Agriculture reduced corn demand 425 million bushels for this coming marketing year from a combination of lower inventory and higher values. There are thoughts we could easily see another 200 to 400 million bushel reduction to corn usage by the end of the marketing year.
The debate surrounding this situation is if corn demand will be curtailed by price or by competition from other sources in the world market, mainly South America. South American corn production forecasts are rising at the same time U.S. production is decreasing. We are also seeing larger corn crop estimates out of Ukraine. When added together, these three suppliers are expected to produce nearly 2 billion bushels more corn than a year ago.
The real question surrounding this topic is if corn demand even needs to be cut. The current new crop carryout projection is for 1.675 billion bushels. While this is tighter than early forecasts, it is not uncommon to see ending stocks that low. The question is if crop size continues to decrease and we get to a point where corn needs to be rationed. That will change the dynamics of the entire corn complex and make price prediction very difficult.
These issues are not a problem in the soy complex, and in fact, just the opposite is taking place. Soybean carryout is over 1 billion bushels on old crop and just under it on new crop at 995 million bushels. It is quite likely both figures will increase over the remainder of the marketing year, especially if soybeans gain acres that were intended to be seeded to corn. Rather than rationing in corn the question is how competitive soybean values need to be to encourage demand, especially with trade issues and tariffs elevating the cost of our soybeans above the global market.
Some private analysts are not as optimistic on U.S. ending stocks. For corn we are starting to see a range from 1 to 1.2 billion bushels. For soybeans we are starting to see estimates of 500 to 700 million bushels. While these are roughly 50% of what trade was initially forecasting, we are now starting to see demand slow, indicating these may be the lowest ending stocks predictions we see.
While acres are still a market topic, we are starting to see more interest on crop condition. Crop ratings this year are well below where they were a year ago, which immediately generates ideas of smaller crops. History shows that the correlation between ratings and yields is not very accurate, but they can give us an idea of overall crop health. The lowest ratings this year are also in the regions where the most unplanted acres are, specifically the Eastern Corn Belt. Some models have this region losing 700 million bushels of corn output this year.
A result of this production loss is a much-improved regional basis. It is not uncommon to see corn basis values for immediate ship bushels as much as 50 cents over CME futures. Even with bids at this level farmers are hesitant to make sales as they are worried over new crop production and may need old crop bushels to fulfill these commitments.
China’s import data for the calendar year has been released, showing some significant changes from a year ago. From January through May, China has imported 12.2% fewer soybeans and 12.4% less wheat. Corn imports grew by 41.4% over this period though, and soy oil imports rose by 92.6%. The most attention was on pork, as May imports were 63% greater than the same month a year ago. Even if this pork is not coming from the U.S., hopes are it will create a void that the U.S. will be able to fill.
Quality is becoming more of a topic in the market as reports of stored inventory going out of condition rise. This is not surprising given the fact many bins across the Corn Belt were filled last fall and are now just starting to be emptied. The fact that weather conditions have been less than perfect for storing grain is also behind the losses. This could easily raise the premium that buyers are willing to pay for higher quality deliveries.
This commentary is the sole opinion of Karl Setzer, market adviser for AgriVisor. This is intended for informational purposes only and not to be used for specific trading recommendations. The information used to generate this commentary is gathered from a variety of sources believed to be accurate. If you have any questions or would like additional market information, feel free to contact Karl at firstname.lastname@example.org. You can also follow Karl on Twitter via @ksetzergrains.