Ben Brown

Winter grain market outlook

By Dusty Sonnenberg, CCA, Ohio Field Leader: a project of the Ohio Soybean Council and soybean checkoff

As farmers are making decisions for 2021, there are some important economic drivers to consider. 

“There are also some factors we really need to pay attention to,” said Ben Brown, now a senior research associate at the University of Missouri and their state specialist in ag business and policy for Extension. “It is uncertain the direction the COVID pandemic takes, what future relief/stimulus packages may look like, and the impact of the resurgence of African swine fever in China.”

Brown was part of the program of a recent Ohio State University Extension Winter Policy and Outlook Meeting where he shared information focused on “Where we’ve been, where we are currently, and where we are going with the markets.”

Brown pointed out that it is important to understand how money flows into the sector. The commodity sector and the U.S. Dollar (USD) are inversely correlated, so as the dollar goes up the commodities go down, or oppositely, as the U.S. dollar goes down, commodities go up.

 “The USD is the benchmark pricing mechanism for most commodities,” Brown said. “Commodities are global assets. The Biden administration is appealing to Congress for more federal stimulus in 2021. This could put more downward pressure on the USD. There are managed money funds that have pumped large sums of money into commodities. This exposes us to downside risk because the managed monies can enter and exit the market very quickly.”

COVID-19 is a wildcard and has had an impact on agriculture with restrictions around the globe. “The COVID-19 Christmas spike is now being observed and could increase restrictions globally,” Brown said. “There were a lot of restrictions in June, it got lighter in summer, and now is getting heavier. Great Brittan could be in a virtual lockdown thru the summer.”

The Phase 1 trade deal with China will be important to watch in the coming months. 

“For agriculture, China reached 64% of their target in 2020, but U.S. imports were up 65% over 2019,” Brown said. “U.S. Data shows the previous record of $25.9 billion. January through November stand at $21.7 Billion. This has been predominantly in soybeans.”

In the rest of the trade package, other sectors did not fare as well. 

“In the energy sector, China only reached 39% of their target,” Brown said. “For manufactured goods China reached 60% of the target. For uncovered goods, no target was set, but trade was down 23% from 2017 levels.”

When watching the activities in China, one new factor is the finding of African swine fever (ASF) once again.

 “China has found ASF outbreaks in their swine heard found in Guangdong,” said Brown. “This was the first cases found in 3 months.” 

The Chinese pork industry is increasing rapidly, and in a more modern way than before. “China’s hog herd reportedly grew 31% year over year, but hog prices and feeding margins remain strong,” Brown said. “These strong producer prices have aided China in building a more modern pork industry.”  

Brown also noted that Germany has found more than 30 ASF cases in recent days. 

“Germany had been in talks with China, Japan and others to relax restrictions on German pork imports,” Brown said. “It is uncertain where those are at now.”

The domestic consumption of soybean meal in China has increased steadily. 

“Weekly soybean meal crush exceeded 2 million metric tons (mmt), 23 different times in 2020,” Brown said. “It only did that five times between 2017 and 2019. China has removed food waste from their rations, and allowed soybean meal to come in.”

Another obstacle for U.S. commodity prices is continued South American production growth. 

“Brazil is expected to set new records in corn and soy production, primarily due to first year acres coming into production,” Brown said. “Argentina remains stable.”

In January, the USDA lowered corn production estimates to 1.5 mmt for Argentina, and 1 mmt for Brazil. There was also lower soybean production estimated at 2 mmt for Argentina. 

“It was dry during a critical time in the growing season,” Brown said. “Weather will have an impact on South American production.”

The USDA’s Jan. 12 WASDE numbers set a bullish tone. 

“The biggest number was the corn yield at 172 which is 3.2 bushels lower than trade average of 175.3,” Brown said. “The 2020/21 ending stocks saw U.S. stocks lower than estimates.” 

The December first quarter grain stocks, however, was a big number.  

“Since 1990, 2020 was the biggest shock to final corn yields in November, from earlier predictions,” Brown said. “The expectation for corn in 2021 is 185 bushels per acre from USDA NASS. The first quarter corn stocks are at 629 million bushels, which is the largest in nearly 3 decades. The stocks were 629 million bushels lower than traders expected, however there was the 288-million-bushel reduction in productions from what traders expected. Subtracting 288 from 629 equals 341 million bushels of more demand than what traders expected. The expectation was lower demand due to COVID restrictions.”

Soybeans yields for 2021 are predicted to be 50.6 bushels per acre. 

“The December first soybean stocks are little over 2.9 billion bushels,” Brown said. “Ending stocks are down to 140 million bushels. There were only two times in the last two decades that we have been lower in soybean stocks than now.”

The soybean crush remains strong. 

“December was 2 million bushels below trade estimates, but 8.4 million bushels above last December,” Brown said. “October 2020 was the largest single month we have had, and December was second.”

Brown is not convinced soybean margins will continue. 

“Demand for soybean meal has been driving soybean margins,” Brown said. “Argentina supplies most of the world’s soybean meal needs, but issues with labor strikes, currency issues, and port loading issues are some of their biggest hold-ups. This opened up opportunities for the U.S., but those opportunities will likely not continue at those same levels in 2021.”

Expectations are that soybean prices may continue to decline as the Brazilian harvests mitigates the short-term supply concerns. The World Supply and Demand fundamentals still point to prices remaining well above the depressed levels observed before August.

The 2021 acreage remains a key question. 

“Profitability gives soybeans the edge against most crops,” Brown said. “The spring weather will be a big factor.”

Brown feels that there are several other factors to watch moving forward, including COVID-19, South American weather, ethanol, and trade.

“The fundamentals for corn and soybeans have greatly improved, and support the current prices,” Brown said. “All the attention was given to the USDA corn yield adjustment, but corn feed and residual demand was also very impressive.

“Gas consumption has been 12 % below year ago levels and has remained there. Ethanol consumption has remained 14% below year ago levels. The more we slow down the economy due to COVID restrictions, the more ethanol will struggle. We have not had drastic reductions in ethanol beyond what we initially experienced with the pandemic.” 

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