Prices could go even higher without significant corn and soybean acre increases

By Jon Scheve, Superior Feed Ingredients, LLC

With the USDA increasing demand for all categories, the tightest carryout since summer 2014 is expected. This has led to plenty of uncertainty in the market. 

Export potential

Exports have the most potential for change as traders are still debating how much U.S. corn will be exported before late August. Some believe cancelations are possible and reductions are still likely, while others expect exports will increase significantly.

Brazil impact

If exports stay strong, Brazilian corn could be imported into the southeast U.S. to relieve tight carryout pressure. However, much of Brazil’s corn crop was planted late, and with recent dry weather, yields may be compromised. Still, crop development there is early and good weather conditions could help improve yield potential.

U.S. New Crop corn

With current export estimates and the USDA predicting only 91.14 million corn acres for 2021, next year’s carryout could be potentially tighter than where we are this year.

Where did all the expected corn acres go? Sorghum planting intentions increased by more than 1 million acres year over year in the southern plain states. This switch is likely due to high sorghum prices relative to corn and better drought tolerance. I would expect this change to stay in place this year.

I was surprised spring wheat acres were basically unchanged year over year since their values haven’t increased nearly as much as corn over the last 6 months. I wouldn’t be surprised if 1 million of the 12 million spring wheat acres planned moved to corn by the June report.

Prevent plant influence

Prevent plant acres have been higher than normal the last 2 years, but with current prices I expect nearly all farmers to push hard to plant every acre possible regardless of weather conditions and late planting windows.

How likely will more acres be added to the June USDA Report?

In the last 20 years, there has never been more than about 3 million combined corn and bean acres added from the March intentions report to the June planting estimate, which occurred in 2014. Also, U.S. farmers have never planted more than 180.4 million corn and bean total acres like they did in 2017. 

With the current USDA corn and bean acre estimated intentions at 178.74, if planting intentions manage to increase by more than 3 million, then 182 million combined acres are still possible.

Projecting potential supply and demand outcomes for 2021

In the chart below I analyzed potential carryout outcomes for next year. I included possible planting scenarios, traditional new crop yield potential, key U.S. supply and demand values, and trends from the last 20 years for reference.

Orange Column — current USDA April WASDE values

Green Columns — potential 2021 supply and demand scenarios

Blue Cells — plausible acreage outcomes on the June report 

Yellow Cells — below trend line yield potential and reduced export pace as a result

Yield estimates

Trendline yields suggest the national yield average should be around 177 or 178. I suspect that if more acres are planted, it will likely be in fringe areas that produce lower yields because there are few prime fields in Illinois and Iowa not already in production.

Ethanol demand estimates

I increased ethanol demand because as vaccinations increase and COVID-19 is more controlled, gasoline usage should see increased demand after Sept. 1. This should also lead to more DDG supply and likely displace some corn in feed rations.

Feed demand

If old crop corn prices remain steady, feed usage demand could face reductions. In 2010 and 2011, feed demand fell 250 million bushels as prices rallied significantly due to dry weather. Also, ethanol demand flattened for the first time. As prices increased and production continued to drop in 2012, there were further feed and ethanol demand reductions. The same situation could occur this year if the weather turns dry or prices rally significantly.

Export demand for 2021/2022

Export pace that far out in time is difficult to assess. I estimate that if dry weather reduces yields, prices will increase significantly and decrease export demand longer term. I also expect after dry weather reduced Ukraine’s yields by 25% last year, their crop production this year will likely be closer to normal which would add 250 million more bushels to world supply. Argentina also suffered yield loss of 250 million bushels under La Niña this year. In both cases the U.S. had to fill the void. If both countries have normal conditions during their next crop production, then there will be more competition in the market a year from now. 

Possible imports of corn?

While the USDA currently has only 18 million bushels estimated to be imported this year, in the summer of 2013 that number jumped up to 160 million bushels. If the second corn crop in Brazil is big enough there is potential for some of it to find its way into the U.S. in late summer both this and next year.

What will it take for sub-$4 corn to come back?

It will take good weather not only in the U.S., but also in Ukraine and Brazil this summer and Argentina next winter. Also, a decrease in Chinese export demand and a big increase in U.S. planted acres could certainly pressure prices.

Bean carryout and price potential

Friday’s report showed a 17-million-bushel reduction in the residual category, which looks to be the USDA’s “fudge factor” section in tight years. In the last 14 years this category has only had a total range of about 50 million bushels, and usually it doesn’t move more than 25 million bushels in any direction in any given year. With the move on Friday, there now seems to be a small amount of room left to move this category lower the balance of the year.

Most old crop beans have been shipped, so large cancelations seem unlikely and processor demand remains strong. Therefore, I expect prices to stay high which will help ration bean demand and potentially encourage Brazilian beans to be imported into the U.S. in July and August. 

In the summer of 2014, imports increased to about 72 million bushels, which is 33 million more bushels than what the USDA currently is estimating. This could be an area to watch moving forward, as it may put downward pressure on prices in late summer. 

Potential acre increases

To meet demand, new crop needs a very large acre increase in the June report, at least 2.5 million acres.  However, as mentioned above, the record acre shift from March to June was only about 3 million acres in 2014.  Therefore, increasing both corn and beans acres to meet increased demand for both crops may prove challenging.

Projecting Potential Carryout, Supply and Demand Outcomes

Like the corn chart above, in the analysis below I project possible planting scenarios, traditional new crop yield potential, key US supply and demand values and trends from the last 20 years for reference.

Orange Column – current USDA April WASDE values

Green Columns — potential 2021 supply and demand scenarios

To meet demand, new crop needs a very large acre increase in the June report, at least 2.5 million acres. However, as mentioned above, the record acre shift from March to June was only about 3 million acres in 2014. Therefore, increasing both corn and beans acres to meet increased demand for both crops may prove challenging.

Blue Cells — plausible acreage outcomes on the June report 

Yellow Cells — below trend line yield potential and reduced export pace as a result

Pink Cells — increasing imports into the United States

If the USDA wants to keep a 120-million-bushel carryout, there will need to be demand reductions. Like corn, without perfect weather, more acres, and reduced Chinese demand, then it’s unlikely prices will pull back significantly. 

Beans have had an average national yield over 50 in 2 of the last 3 years and averaged 49.29 over the last 5 years. Therefore, estimating 50 as a trendline yield for this year seems reasonable. This means over the next year, any production problem could increase prices further, push more demand rationing, or increase U.S. imports.

Planted acres/Brazilian imports

I’m expecting U.S. farmers will find a way to plant 90 million bean acres this year. Plus, I suspect the U.S. will need to import some Brazilian beans in July and August to keep the summer pipeline from running dry this year and next. 

With higher prices, I also suspect Brazil and Argentina will expand their bean production significantly next season, which could ease demand pressure for our new crop production next winter and spring. 

In summary

With what we know today, to meet global demand needs, corn and bean planted acres must hit 182 million collectively in the June report. Plus, weather needs to be normal across the U.S. throughout the growing season and trendline yields need to be average or better. And most importantly, China must continue to import large amounts of corn from the U.S. and other countries throughout the world. Arguably, Chinese export demand is the biggest unknown and poses the most potential risk to prices right now. 

As always, weather will remain an uncertain variable to the market. However, in the last 45 years corn has been at or above trendline yields 66% of the time with beans above 60% of the time. And on average, corn and beans both hit new record national yields 33% of the time. While we usually see a new record yield every 2 to 5 years there has been one time in history where it took 8 years to hit a new record-sized crop. It’s been 3 years since corn’s last record and 4 years since bean’s last record. While there is certainly upside price potential for both corn and beans this year, it’s not guaranteed at this point.

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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