June 20, 2024

Bearish surprises in USDA report

BLOOMINGTON, Ill. — Heading into the U.S. Department of Agriculture’s supply and demand estimates report released July 12, the trade’s big questions included where the corn yield estimate was going go.

USDA answered that with a 4 bushel per acre drop plugged into the corn balance sheet based on data from the National Centers for Environmental Information. Farmer-based surveys on yields will be out in the crop production estimates in August.

The report included several moving pieces, and Advance Trading’s Brian Basting, research analyst, Michael Reginelli, commodity risk consultant, and Drew Moore, chief operating officer, looked at the new numbers in a live recap on YouTube.

“Corn, soybeans and wheat were all down after the report’s release. We’re looking at corn levels we haven’t seen since the fall of 2021,” Moore said.

He followed that with a Q&A for Basting and Reginelli led by Moore.

Moore: What did the report have to say for the soybean complex side?

Basting: A bit of a surprise was from the standpoint USDA adopted the 52-bushel trend yield for the national average on soybeans. Of course, we’re here in the middle of July. Soybeans are not made in July. We have a long way to go here.

I think we’re seeing more double-crop go in. So, USDA took the conservative stance at a 52-bushel nationwide yield. The supply is higher than expected by the trade. The trade was looking for the yield to come down maybe a one-half to 1 bushel from what it was in June. That’s the first part of the equation.

The other side of the equation is more concerned about demand for new crop. USDA took exports down 125 million bushels from what they were expected to be in June. What the USDA is saying is, “We’re seeing some cracks in the demand armor,” if you will.

They took Chinese demand for next year’s imports down 1 million tons. They also took some other countries down a bit.

They’re basically concluding, although they didn’t say it, high prices cure high prices, and these soybean prices have come up quite a bit, obviously with the stronger than expected response to the acreage number.

So, two sides to that equation. USDA left that carryout for 2023-2024 at 300 million bushels. There are some of the trade who are under 150 million carryout for new crop.

So, it’s an evolving story. I don’t want to say this is it for the soybean market because, as viewers know, we don’t make a soybean crop in the middle of July. The next six to eight weeks are very critical weather-wise. There are a lot of moving pieces there.

Corn yield estimates were a big focus going into the report, particularly with drought conditions across the Corn Belt.

Reginelli: USDA took corn yield down. I think the average trade estimate was 176.5 bushels an acre. That’s kind of what the thought was. I think everybody based that on crop conditions and the dryness that was experienced in the Midwest in June and expected that yield to come down.

USDA did at least begin that process, coming in at 177.5, about 1 bushel higher than what the average trade guess was. It seems like it’s trending in the right direction. We’ll get that data in the coming months, so I think that’ll give us a little better look, but it seems like things have stabilized a little bit. The trade was obviously factoring in something close to what the USDA gave us.

Really there wasn’t a lot else in the corn story. Ending stocks were fairly close at 2.26 billion bushels for new crop of what the market was looking for.

We did see old crop stocks come down a little bit. That was somewhat expected after the tighter June 30 stocks report. So, that was expected to some degree. World corn stocks grew a little bit, too, which was also likely to lean on the market a little bit and be somewhat bearish.

Moore: Looking at new crop balance sheets, looking at December forward spreads, November soybean forward spreads, new crop forward spreads, what likely plays out moving forward, or what’s the market telling us right now?

Reginelli: There’s going to be a lot that we have to figure out still. We’re going to make the soybean crop in August. We need to see how the balance of July plays out, especially as more corn gets closer to pollination and we kind of better define the yield.

What we do know is there’s obviously demand headwinds in both corn and soybeans, according to the USDA. You feel it on the lack of flashes and when you look at the weekly sales and inspections, too.

So, there are some demand headwinds expected as we move forward. That 2.2 billion, 2.3 billion carryout on corn, if realized, would be the largest carryout we’ve had in a number of years. It’s heavy. It justifies lower prices. It also likely justifies wider spreads, though.

When you start thinking about spreads in the new crop time frame, the other thing is interest costs are higher than what we’ve contended with in a number of years. And so I mean full carry for December, March corn — 30 to 30.5 cents — and probably 28 cents on November, January soybeans. Based on where spreads are priced today, there’s a ways to go if we’re actually going to challenge those numbers.

But, again, there’s a lot that can change not just on the production, but also the demand side as we move forward, particularly if that 300 million carryout on soybeans begins go to come down.

Corn feels, at least at face value, more comfortably as we work our way into the fall than soybean do, but you don’t hear a lot of people saying that 52-bushel per acre soybean yield is almost a guarantee or that there’s opportunity to move that number higher and the demand cuts on soybeans will be met with some skepticism.

The reality is if those acres numbers we got on June 30 are right, we just lost 4 million soybean acres and we’re just going to have a smaller supply base to play with as we work into the fall.

Basting: Keep in mind there’s still a lot of volatility potentially ahead of us. Defend your balance sheet if you’re a producer. Give yourself flexibility, put a floor underneath these markets, but give yourself flexibility and continue to manage price movement rather than predict price movement.

Moore: What’s your outlook in wheat classes looking at the report and moving forward? Obviously, we continue to see Black Sea issues persist, although it seems like the trade seems somewhat muted to certain instances.

Reginelli: The wheat side of the balance sheet is a little bit different here. Production and ending stocks both grew for this upcoming 2023-2024 crop with its harvest ongoing. It tends to lean a little bearish, but we did see world stocks come down pretty substantially.

World wheat ending stocks were at 266 million metric tons while the average guess was 269 million tons. Obviously, with the higher production numbers in the U.S., that’s not where the cuts are coming from. Argentina, Canada and the EU also saw 2-plus million metric ton cuts.

So, smaller crops and tighter stocks in other parts of the world tightened up that number. It was a little bit of an offset from the bull to bearish side.

Basting: There is a feeling at this point that seems to be growing amongst the trade is that the fate of the Black Sea Initiative is not looking really good right now. We may be surprised. That has kept the flow of grain moving out of Ukraine. That could change things a bit if that is discontinued.

We’ve seen some really nice soft red winter wheat yields here in the Midwest. We’ve also seen some higher than expected hard red winter wheat yields out west. It’s still poor, but USDA did increase our domestic hard red winter production and domestic soft red winter production from what it was in June, which is encouraging from that standpoint domestically. The carryout is higher on all wheat.

I think moving forward we’re looking at a world market now focusing more and more on the Southern Hemisphere. What’s going to happen in Argentina and Australia? USDA lowered Argentina production 2 million tons and they’re keeping a close eye on Australia because of close correlation between El Niño and drought in Australia.

So, going forward, the wheat market, even though the worldwide supplies are down below trade expectations, they’re ample, and we don’t have an event now to give that wheat market ignition fire on the upside. That’s why we’re watching the Southern Hemisphere closely. In a nutshell, wheat feels heavy at the moment.

Tom Doran

Tom C. Doran

Field Editor