USDA confirms tightening grain and oilseed supplies

By Mike Zuzolo, Global Commodity Analytics & Consulting LLC

With energy resuming its rally, tightening supplies and little sign of demand rationing, grains and soybeans have one more major hurdle to jump for a counter-seasonal harvest rally: the late-September Trump-Xi meeting.

Geopolitical fundamentals continue to show escalation, rather than the de-escalation the trade had priced in, in key commodity regions of the Middle East and Baltic. In my view, this has helped keep the entire commodity complex supported.

In addition, USDA continued to raise U.S. average prices for wheat, corn and soybeans in its September WASDE update, a feature that usually suggests limited demand rationing is taking place. Since May, USDA has increased the average corn price by 30 cents per bushel to $4.80 and the soybean price by 60 cents per bushel to $12.

In the aftermath of the September WASDE report, two major questions are running through my mind heading into October:

1. Based on information from my clients and subscribers, was USDA correct in lowering its corn yield estimate while raising its soybean yield estimate?
2. Will the surge in Chinese purchases of U.S. soybeans hold up after the Trump-Xi meeting in late September?
   

Notice both questions revolve around soybeans. While the U.S. stocks-to-use ratio has now slipped below 7%, the world surplus remains fairly elevated at 28%, with Brazil now beginning to plant.

I am inclined toward a lower soybean yield

The cooler, wetter weather expected in September covered a much smaller area than anticipated, and the hot, dry conditions likely damaged soybean yield prospects.

Based on comments from producers in Ohio, Indiana, Illinois, Missouri and Kansas, record-setting soybean yield potential has been lost to the hot, dry weather of late August and early September. In addition, disease pressure seems likely to increase.

I’m currently leaning toward a U.S. national average soybean yield of 50.5 to 51.5 bushels per acre. If USDA lowered its estimate to the midpoint of that range, 51 bushels per acre, it would shave around 150 million bushels from the current carryover projection. With no other changes to the September WASDE balance sheet, that would leave potential carryover around 156 million bushels.

This is where U.S.-China relations come into play.

Why has China been buying so many U.S. soybeans? To me, it’s obvious: China is fulfilling a commitment made at the May summit and is planning to use that commitment as one of its largest bargaining chips in negotiations.

Does China really need to buy the soybeans for crush? I don’t think so, given its still-weak hog industry and overall weak domestic consumption. But in this environment, much like crude oil, China doesn’t mind stockpiling, especially if there are geopolitical reasons to do so.

When viewing supply and demand from this perspective, integrating geopolitics and crude oil into the equation, it becomes much easier for me to recommend that clients put price floors underneath their soybean crop heading into the late-September meeting. At the same time, I would leave cash-related selling alone until we know more about actual yields.

I will close with this thought: As Brazil progresses through planting, if El Niño does not damage its crop production potential, I will become more skeptical about future Chinese purchases from the United States, especially if prices remain at these elevated levels.

Shrinking supplies could support cattle and hog prices

Thanks to USDA’s recognition of shrinking supplies, I think cattle and hogs may have found their “demand low” heading into the end of 2026.

In the September WASDE report, USDA cut commercial beef production for the third month in a row, moving from 25.44 billion pounds to 24.88 billion pounds. That’s a reduction of 561 million pounds, or, more importantly, 2.2% less commercial production.

This was easy to see, in my estimation, as USDA’s weekly red meat production data continues to show year-to-date production down more than 5%.

Yet, the futures trade, especially fund investors, had been taking USDA’s earlier production numbers and expectations for large cattle-on-feed supplies as major price indicators.

My sense for the next 30 days is that live cattle have more upside potential than feeder cattle, as long as corn continues to rally. Here again, it seems to me that fund investors have been heavily involved in buying corn and selling feeder cattle as a spread since the middle of this year.

But given that Choice cutout values are back near last year’s levels, I wonder why live cattle prices aren’t there as well. The continued reduction in beef supplies reflected in three months of WASDE reports makes me wonder this even more.

Disclaimer: There is significant risk of loss in trading futures and options on futures, and they may not be suitable for all investors. Investors should consider the risks involved and evaluate their suitability based on their financial conditions. Past performance is not indicative of future results.

Mike Zuzolo has been a licensed Series 3 broker and commodities analyst since 1995 and is the founder of Global Commodity Analytics & Consulting LLC. A native of Preble County, Ohio, Mike and his family have lived in northeast Kansas since 2013. Sign up for a four-week free trial of Mike’s analysis at globalcommresearch.com.