A look at the February USDA numbers

By Jon Scheve, Superior Feed Ingredients, LLC

The February USDA report is usually considered less important than most other monthly reports but this one offered some surprises. Here are some report observations and highlights.

Corn

The market was hoping for some big adjustments but were disappointed when the corn carryout was only decreased 50 million bushels. The average trade guess had expected a drop of nearly 150 million bushels. 

The USDA seems to be playing catch up when estimating final carryout at the end of the marketing year in August. If they lower carryout too quickly, the market could spike early and force a rapid drop in demand. That could in turn hurt overall demand and trim usage later or even worse decrease demand long-term. On the other hand, decreasing carryout too slowly may mean limited short-term demand rationing, which could cause supply issues later this year and early 2022.

February’s report showed exports increased by 50 million bushels. This suggests there is strong export potential, despite slower than usual shipment pace. If export demand and pace stay strong for the next 6 months, and the USDA increases the export number each month by 50 million more bushels, it could still further reduce the carryout by 300 million. This would mean carryout is eventually reduced to 1.2 billion by the end of the marketing year. 

Some bullish traders think final carryout will be under 1.2 billion, which is theoretically possible if feed, ethanol and export pace stay consistent. There are some who believe that the market is currently trading a carryout between 1.3-1.4 billion bushels.

In South America, Argentina weather hasn’t been as dry as expected. While the last five La Niña weather events resulted in 20% to 25% yield reductions, current USDA estimates show only a 10% reduction in yield and some private forecasters are only looking at a 15% reduction this season. 

Due to excessive precipitation, Brazil’s second corn crop’s planting pace is behind. If significant planting progress isn’t made in the next 2 weeks, a lot of their corn will be pollinating in late May’s dry season. Generally, the later Brazil’s crop is planted the more volatility in their final yield.

Global corn carryout increased slightly in the February USDA report, while wheat carryout dropped. This suggests wheat is replacing corn in feed rations around the world. Demand for other feed grains is still very strong as world feeders search for economical replacements for corn.

The USDA did surprise the market by increasing Chinese imports from 17 million metric tons (MMT) to 24 MMT, when analysts only expected the USDA to show at most 20 MMT of world demand in this report. Some market participants think China could import even more, with estimates as high as 30 MMT. This is significantly higher than the 5 to 7 MMT that China has imported the last few years.

COVID-19 vaccinations are increasing and infection cases are dropping, so global economies may start opening more. Weather should start warming up soon and driving season is around the corner, so gas and ethanol demand may start moving higher. High priced DDGs along with higher ethanol prices should keep margins profitable for ethanol plants, despite higher corn values.

Usually, during this time of year the futures market has a carry in the spread between the March and July contracts, but currently there is a large inverse (i.e. when the nearby month is higher than months after it). This hasn’t happened since 2013 and suggests the market wants corn now and not later. This inverse will likely push many commercial elevators to set basis and ship corn sooner than later.

I know some farmers with unpriced corn still left in bins, and they don’t seem to be planning to sell anytime soon regardless of price levels. Many of these farmers think there will be a summer drought, so they want to wait until after July 4th, hoping for $8 corn like they saw in 2012.

If elevators have set basis on their corn ownership and many farmers aren’t selling the remainder of their grain until mid-summer, then cash grain prices through June could get interesting. A large basis spike after May 1 is a real possibility. This happened in the early summers that followed the drought years of 2011 and 2012 when the carryout was last this tight.

Beans

The USDA showed the tightest bean stock to use ratio ever. The 120-million-bushel carryout was 3 million less than the market expected, which isn’t bearish information. After the report, Midwest basis bids were 10 cents higher, indicating end users are concerned they will run out of beans by summer.

The Brazilian bean crop is still expected to be sizable and significantly larger than last year. Also, 2022 harvest production predictions show big growth potential too. This suggests that while prices are strong today, and probably through all of 2021, eventually prices will likely turn around. The 2021 Brazil harvest is moving slow, but once the crop is harvested, export pace will ramp up substantially. There are some concerned that as Brazil’s bean prices become more competitive, there may be U.S. shipment cancellations.

The Chinese New Year just began and lasts over two weeks. The market could be range-bound and slightly boring for the next couple of weeks with the world’s biggest bean buyer on break.

The next big factor impacting the market will be the acreage battle between corn and soybeans over the next few months. The first look at planting intentions will be the USDA Outlook Forum the end of next week. Then on March 31 the widely anticipated spring planting intentions report from the USDA will be released.

Please email jon@superiorfeed.com with any questions or to learn more. Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.

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