Given recent weather conditions across the Corn Belt we have seen many forecasters reduce their yield possibilities. Even with this taking place, the futures market continues to flounder. One of the main reasons for this is that we have abundant old crop supplies that can be used to help buffer any losses in new crop. Another reason for the delayed reaction is that demand is also decreasing, which could easily leave ending stocks unchanged, even with reduced production.
An alternative answer is that for several years risk premium has been added to futures but not needed. Improved farming practices and higher quality genetics have allowed today’s crops to better withstand adverse weather conditions. As a result, traders want proof that yield has been lost before over-extending current bids.
While yields are a major factor in crop production, just as much attention should be placed on acreage. Changes to acreage can and usually do have more of an impact on production than yield per acre. This year the most attention on this should be on corn, where fewer harvested acres than being used in balance sheets are quite possible.
Even though we are still in the midst of this growing season, some analysts are already looking forward to next year’s production possibilities. While old crop reserves will cushion any short-fall in production this year, it is doubtful stocks could cover two years of low production. As a result, we may start to see a push for new crop acres much sooner than usual in the market.
The most questions on demand right now are centered on the soy complex. Crush keeps lagging projections and will likely fall short of an already lowered yearly objective. The only way we won’t see a reduction for the year is with record usage in July and August, which is highly unlikely. There is a good chance export sales could negate this decline, but actual loadings are casting a shadow of doubt over those numbers as well.
One use that might surprise us is feed demand. Wheat values have risen to a point where many feeders will start to shift away from using them in feed rations. As a result we could see more corn and DDGs used in feed rations. This is not as much of a factor for the domestic market as the global market, but could still be a factor in price discovery.
Demand may slow at times, but overall we are seeing continuous growth in corn and soybean usage on the global level. Over the past ten years we have seen world corn demand increase by 1 billion bu per year. Soybean demand over this period has grown by 435 million bu annually. This growth in usage makes it important that world output increases as well.
This does not necessarily mean buyers have to come to the United States for needs, however. South America continues to expand corn and soybean production, and also increase the share of the world market they supply needs to. This means we could see a slight decrease in demand for U.S. offerings, even with world usage growing. As a result, the United States needs to remain more competitive than ever in the global marketplace.
We are starting to see storage needs evaluated and compared to last year. According to research from the firm Advance Trading, storage availability should be greater this year in the United States than last. This is from prospects for decreased yields from a year ago. This depends greatly on how much old crop is held though, and more importantly, what farmers decide to do with their on-farm storage facilities.
Weather has undoubtedly affected yield potential this year, but there are other factors that are influencing production as well. One of the main ones is insects in corn. Last winter’s mild conditions were favorable for insect development and this is now showing up, mainly in fields that were planted to corn both last year and this year. This can greatly affect production, even in fields that appear to be in good conditions from a distance.
Even though we are in the later stages of the U.S. growing season, weather remains a key factor in price discovery. There is still time for weather to impact U.S. yields, especially on soybeans. Weather can also be a factor when it comes to harvest, although this seldom causes a significant reaction in the market. We are approaching the South American planting season however, and that will keep the interest on weather elevated.
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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