A report from the USDA shows net U.S. farm incomes will decline substantially this year – $71.5 billion for 2016, an 11.5 percent decrease from 2015.
This is mostly from the poor prices from which the commodity market has suffered. Even though this is the lowest net farm income since 2009, it is better than the initial yearly projection of $54.8 billion.
Corn harvest is getting underway in the southern states. This has been confined to the Delta region, and so far, reliable yield data is hard to find. The simple fact that the U.S. corn supply is growing is enough to pressure futures, and in many cases, the cash market as well. Basis pressure will only increase as harvest progresses north.
Not only is market attention shifting to harvest in the United States, but in other countries as well. The trade is monitoring China the most, where corn inventory is already reported at a record high level. Some reports show China is holding upward to 9 billion bushels of corn in government reserve facilities.
The anticipation of these extra bushels has been the primary factor in China auctioning off reserves in recent months, and possibly its restrictions on distiller grain imports as well.
When it comes to production this year, it is not if the crops will be large, but rather how large they will be.
Many analysts believe we will see higher yield estimates than what were just published in future production reports. The reality with this now is that unless we see higher estimates, trade may consider it a bullish surprise. This could easily set the market up for a classic case of “sell the rumor, buy the fact” as the year progresses.
An ever better question is if production will be large enough, mainly on soybeans. There are several usage models that indicate soybean production will fall short of demand, even with better-than-expected yields. This is not so much from domestic demand, but from the global side.
The answer to this lies in South America and if its crops are able to satisfy needs. Many analysts do not think they will, and buyers will come to the U.S. for coverage.
We are starting to get a better idea of what we may have for grain reserves at the end of the old crop marketing year. It appears export loadings will fall short of sales, but not by a significant amount. Cumulative loadings indicate we will have to carry a portion of our export sales into the next marketing year.
Soybean loadings should be able to make their projected total for the year.
Dried distiller’s grain values have been under pressure in recent weeks and are showing no sign of recovering. One reason for the decline in values is the set-back in commodities on a whole, but the record ethanol manufacturing pace we have seen is also a factor.
A concern with this is that DDGs have been a major factor in ethanol plant profitability over recent months.
Trade is already looking forward to next year’s production. The most emphasis is on soybeans, where some analysts feel it will be difficult to raise the size of crop that is needed to satisfy demand. It is believed that in order to satisfy demand soybean acres will need to expand between 1.5 and 3 million acres.
This is just one point of view though, as others claim yield will be more than enough to satisfy domestic usage, and South American production will expand more than expected.
One of the greatest unknowns in the market right now, other than U.S. production, is what we will see for acres in South America this year. According to sources in those countries, plantings of soybeans will be down this year as farmers opt to raise corn instead.
More favorable tax rates are a primary reason for this in Argentina, while Brazil needs to seed corn to make up for a short crop this year. This could easily keep the demand we are seeing on U.S. soybeans in the global market at an elevated level.
Weather will be a significant factor in next year’s production, and there are models that are now indicating we will start to transition into a La Nina weather system. The pattern we have been following is similar to the one in 1999 when we exited an El Nino to see a moderate La Nina build.
Research from the firm F.C. Stone shows corn yield benefitted from this shift that year, and yield ending up being 101 percent of trend.
This would equate to a yield of 171.7 bushels per acre given this year’s projected yield.
While the corn yield apparently benefitted from the La Nina in 1999, soybeans did not. If the loss in soybean yield in that year is plugged into current balance sheets, it would indicate a yield of 44 bushels per acre.
It would take a sizable increase in acres to compensate for this size of a yield loss.
Karl Setzer is a commodity trading advisor/market analyst based in the West Bend office of MaxYield Cooperative. He can be reached at (800) 383-0003.
The opinions and views in this commentary are solely those of Karl Setzer. Data used for this commentary obtained from various sources believed to be accurate. This commentary is intended for informational purposes only and is not intended for developing specific commodity trading strategies. Any and all risk involved with commodity trading should be determined before establishing a futures position.
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