By Jon Scheve, Superior Feed Ingredients, LLC
Last week’s USDA report had positive news for farmers, with both on farm stocks and planted acres being lower than the trade was estimating.
With this report published, weather will be the main market driver going forward. So far, 75% of the Corn Belt has had good weather. However, dry conditions in the northwest part of the Corn Belt have been a concern and its impact on yields is uncertain.
I updated my supply and demand tables to account for the USDA’s planted acre estimates. I’ve also included several potential yield outcomes (the red section).
If Carryout/Ending Stocks hit 1 billion (1,000), it would be as if the country was basically out of corn and prices could reach $8. However, if Carryout/Ending Stocks hit 1.6 billion (1,600), prices would probably pull back to around $4.
Based upon the USDA’s demand structure in the June report, and assuming trendline yields, current prices are somewhat overvalued. However, if the northwest part of the Corn Belt’s weather conditions worsens and drag the national yield average lower, then carryout will likely remain as tight as this current year and prices may need to rally to ration demand. Also, prices could trend higher if ethanol and Chinese export demand increases for old crop as well as new crop.
There are some in the trade who believe that with Brazilian corn production estimates dropping each week that more export demand will be shifted to the U.S. The only issue with that belief is that Ukraine corn production is estimated to be back to trendline levels after dropping nearly 25% last year. This additional production could make up for some lost Brazilian production.
The USDA report also showed a slight bean acre decrease compared to the March report. Now, like corn, upcoming weather will dictate price direction. Where July weather impacts corn the most, August weather impacts beans more. So, we will likely need to wait another month to determine how much weather is going to impact bean yields.
In the table below I have included several yield scenarios (the red section) and its impact on carryout.
If Carryout/Ending Stocks hit 100 million bushels (100), it’s basically like being out of beans in the U.S. and could rally prices into the high teens. On the other hand, 250 million bushels (250) would likely create a big surplus and send prices back toward $10. Beans are going to be extremely sensitive to weather issues, as any minimal carryout change can shift prices $1 per bushel.
Based upon USDA estimates, I lowered crush demand (the blue section) if yields were below trendline and I increased export demand (the green section) if yields were above trendline. If yields are above trendline, it’s likely bean prices are overvalued. However, if August weather conditions lead to below trendline yields, it will take higher prices to ration demand.
We are now trading a weather market. Corn may face production issues with the northwestern corn belt as dry as it is. The July 4th weekend often creates fireworks, as the following 2-week weather forecast looks at what will occur during the heart of corn pollination. July weather does not affect beans as much, so they will stay a wild card until August forecasts become available.
There is still debate in the trade as to how many more bushels will be exported yet for the 2020 crop let alone the 2021 crop. Each week the market will receive updates on those number and that could create dramatic price swings.
It seems as though prices will continue to be a very bumpy ride for the next two months.
Please email firstname.lastname@example.org 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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