USDA Confirms Huge Grain Supply
On Friday, the USDA released its January crop reports and confirmed the huge grain supplies across the globe. Starting with corn, they raised the final yield on the crop by 1.2 bpa up to 176.6, which is a new record and larger than expected. However, they did reduce harvested corn acres by 400,000 acres down to 82.7 M and they did reduce planted acres down by 200,000 acres down to 90.2 M. On the demand side, they left exports and corn used for ethanol unchanged from last month. They also pegged the December 1st corn stocks at 12.516 B bu which was larger than expected. When the dust settled, corn ending stocks increased by 25 M bu up to 2.477 B bu. This is a tremendous amount of corn and March corn futures made a new low on the news, trading down to $3.45 ½.
On beans, the situation was not quite as bearish. The USDA left the harvested acres unchanged, but reduced the yield by .4 bpa down to 49.1 bpa. They did increase the amount of beans used for crush by 10 M bu but they did decrease the amount of beans exported out of the country by 65 M bu down to 2.160 B bu. Even though we did see a yield reduction and an increase in crush, these gains were more than offset by the decrease in exports. Dec 1st bean stocks came in at 3.157 B bu, which was slightly supportive. When the dust settled, bean ending stocks increased by 20 M bu up to 470 M bu.
Major USDA Report on Friday
The USDA will be out with its January crop report at 11 am on Friday. This will be a significant report and it usually causes a big move, one way or the other, for grain futures at Chicago. On Friday, the USDA will report Dec 1st grain stocks, update the monthly grain supply and demand tables, and also update the trade on wheat acres planted. This is a big report with a great amount of information being released. There is a good chance that the market will be surprised by something, and thus it is likely that the market will gyrate significantly after the numbers are released at 11 am on Friday. Many feel that the corn yield could grow slightly and many feel the current corn export projection is too high and it needs to be lowered. If either one of these scenarios happen on Friday, this will cause the already massive corn carryout to grow larger, and this will put downward pressure on the market.
Cold Start to the New Year
As we start a new year, the market is dealing with several items that have moved to the surface. First is the extreme cold temperatures across most of the Corn Belt. This has the market worried about the winter wheat crop and how much damage will be created since many of the acres in the US do not have a snow cover to add protection. For months, the wheat market has been in a downward slide. For now, it looks like we might have hit solid support, and are bouncing back. For those of you who have wheat planted, I would keep my eye on new crop wheat values in the coming weeks. I believe the wheat market has shifted, and is now on an uptrend, and could move significantly higher.
The USDA released its December crop report last Tuesday, and it adjusted several items on the supply and demand tables. On corn, the bright spot was a 50 M bu increase in corn used in ethanol production. Last weeks ethanol production was the second largest on record as the relative lower cost of corn is stimulating additional usage. Although true, the ethanol industry is struggling with slimmer margins than in the past. Current ethanol margins were 6 cents per gallon last week, and the average conversion rate now is one bushel of corn will produce 2.82 gallons of ethanol. The USDA left exports unchanged at 1.925 B bu. Even though corn exports have really been struggling as of late, there are signs that this situation could be changing. Last week, the US did sell one cargo unit of corn to China, and Morocco and Mexico have also been recent buyers. As corn makes new lows, our corn becomes more and more competitive on the world stage. When the dust settled, corn ending stocks were reduced by 50 M bu down to 2.437 B bu. Even though we are moving in the right direction, this is still a huge amount of corn that will continue to weigh on the market.
The USDA will be out with its December monthly crop report on Tuesday at 11 am. As the old saying goes, “big crops generally get bigger,” there is a decent chance that both corn and bean carryouts could grow slightly after the numbers are released. Why? Because our exports are lagging the original projections from the USDA of 1.925 B bu of corn exports and 2.25 B bu of bean exports. When the grain does not leave the country, its starts to stack up in the interior. The Chinese have been aggressive buyers of US beans, and we have made recent corn trades with Mexico and possibly the Chinese as well. However, the current low price of corn and beans are starting to stimulate demand, and we are getting to the time of year where Brazil can no longer be the lowest cost world supplier of corn. The second best option is the US and I expect the corn export pace to ramp up considerably next month.
One item that might offset the lagging exports is the huge quantity of corn being used for ethanol this year. For several years, the amount of corn used for ethanol production was at the 5.0 B bu level and it stayed relatively constant. However, as the world becomes more comfortable using the 15% ethanol blend in their gasoline for their cars, or burning E85 which is 85% corn ethanol, the amount of corn consumed by the ethanol industry has grown in recent years. In 2016 we used 5.224 B bu of corn for ethanol, in 2017 we used 5.439, and this year I believe it will be over 5.5 B bu when the dust settles. This increase in ethanol production will offset the lagging exports to a degree and might leave corn ending stocks unchanged. We will all find out at 11 am today what the government’s opinion is on these categories.
The market is becoming very concerned about the weather in Argentina. Brazil was plagued with wet weather several weeks ago, but that situation has improved. Argentina is dry, and the market is adding risk premium due to this situation. The world is counting on a large bean harvest from Argentina. If this dry weather continues, the world bean carryout could be cut quite significantly. However, it is early in their growing season, and there is time for the situation to improve. Friday was the first day of the month and the funds decided to buy bean futures and add to their existing long bean position. On Monday, they continued to buy bean futures and pushed beans higher through the day. It is normal for beans to rally during the Thanksgiving holiday, so the strength in beans was not unexpected.
It is interesting to see that even though beans and wheat rallied significantly on Monday, corn could do very little amongst the strength in the other grains. Corn is still being weighed down by the huge carryover of roughly 2.5 B Bu. In addition, corn is struggling to rally as there are a huge amount of farmer sell orders just above the market. Any attempt for corn to rally and these orders squash any rally attempt. The farmer generally sold his beans for cash flow at harvest, but is storing his corn in any where possible. Our US corn exports are also struggling to keep pace, and it is very likely that the USDA will need to lower corn exports by approximately 100 M bu on the next Monthly Crop Report on December 12. If this happens, we could see corn carryout be raised by this same amount to nearly 2.6 B Bu, a truly huge amount of excess corn.
In A Carry Market
As most of you are now done, or almost done with harvest, I would like to take a minute and start looking at new crop levels for next harvest of 2018. It is no secret that we are in a carry market with huge amounts of corn and bean carryouts each year. There is a large quantity of farmer selling orders above the market, and any market rally attempt is quickly stalled by selling orders from the country. I don’t see this changing anytime soon, especially in the corn market. The farmer is undersold on corn in a large way, and the market knows this. This situation creates huge board carries. This means the market heavily discounts the front end, but rewards the producer for locking in deferred values now. My guess is that cash corn will stay close to the $3.00 level over time, but the carry will slowly grind out of the market over time. What do I mean by this? Let’s go back two months ago. The cash price for corn delivered into Readfield for July 2018 delivery was roughly a 50 cent premium over the cash price. Today, this premium has been reduced to only 27 cents. If we wait another month, it will likely drop to 20 cents, and until we eventually get to almost even money. The point is that the market is willing to pay you a premium if you are willing to step up and write a contract to lock these premiums in. However, you only get these premiums if you contract the grain. If you do nothing, once we get to July, the cash price of corn will be the same as it is today, roughly $3.00, and that entire 50 cent premium has just vanished over time. This is a text book definition of big carry markets and how the carry gets “ground out” as we move through the crop year. Big premiums are available for those who take the time, create a plan, and are willing to forward contract their grain. One cannot receive this big premium by waiting until July 1, and selling cash at that point, but forward contracting those levels NOW for delivery THEN.
China Buys Corn
The big news this week was that China was in the market place buying corn and ethanol. We have seen the Chinese purchase soybeans for many years, and frankly, we count on them to buy huge quantities of beans during the fall harvest. They are a cornerstone of our US bean export program, and help to add stability during a time when prices in beans could get quite sloppy. So when we see the Chinese looking at buying corn and / or ethanol, the market pays attention, and it causes some unique things to happen.
The funds currently have a huge net short position in corn futures. They are so short that last week’s Commitment of Trader’s report showed that they broke a new record on the size of their short position. Previously, the record short for managed money was 229,000 contracts of short corn futures. Last week’s report had them short 231,000 contracts, or a new record. The funds are short because the fundamentals tell them to be so. The corn crop is huge. Our corn export program is in the tank. The crop seems to be getting bigger each month, and there is a huge amount of farmer selling just above the market. All of this is weighing on corn, and they see this and are putting their money where it counts.
The USDA came out with its November crop report on Thursday and shocked the market with their interpretation of the current crop. Most believed that bean yields would be lowered and corn yields would be raised slightly from the October report. This was not what the USDA had in mind, and their report dramatically altered the markets going forward.
In the case of corn, the USDA raised this year’s production by a whopping 3.6 bpa which took their final corn yield to 175.4 bpa. This is a huge yield and beat last year’s average yield by .9 bpa. Production was raised by 293 M Bu from last month’s total to a jaw breaking 14.578 B bu. In addition to the yield increase, the USDA also increased exports by 75 M Bu to 1.925 B Bu. Many traders are scratching their heads about this number as we are having a very difficult time making increased export sales to foreign buyers today, yet the USDA is projecting a big increase. Time will tell on whether the USDA is right or not. But the only way for our exports to increase is through lower prices which none of you will like to see. When the dust settled, the carryout for the 17/18 corn crop was raised 147 M Bu to 2.487 B Bu. This is a tremendous amount of corn carryout and an amount we have not seen for decades since the glut of corn in the mid 80’s. With this amount of corn hanging over the market, it will be very difficult for the market to rally anything significant. Any type of strength will be met with a huge amount of selling from the country.
USDA Crop Report
The USDA will be out with its November Crop Report Today, November 9, at 11 am. I get the feeling that we could see the USDA raise the corn yield by 1-2 bpa and leave the bean yield either unchanged or lowered by up to ½ bpa. We have seen some extraordinary corn yields across the Corn Belt this fall as harvest has progressed thus far. Consequently, later bean yields have not improved like corn throughout the entire Corn Belt. If the above changes in yield are pegged by the government tomorrow, we could see the corn carryout approach 2.5 B Bu which we have not seen since the huge CCC days in the mid 80’s. However, beans are another story. If their yield gets trimmed, we could see carryout reduced from 430 M bu down to something less than 400. Folks, if this happens, we will see fireworks tomorrow at 11 am. The market is, and will continue to be, very sensitive to any reduction in bean carryout. This is especially true since Brazil and Argentina are having weather issues with either being too dry or too wet for optimum bean planting conditions down there. Any sort of change in the bean Supply and Demand table and the market will react accordingly, and possibly very violently depending on the scope of the change.