One of the main objectives of the futures market is often over-looked, and that is simply determining the value of a commodity. When accomplishing this there are several factors that need to be taken into consideration. The main one is simply supply and demand. In year’s such as this when stocks are ample, it is more difficult for a commodity to sustain a rally.
There are several who believe today’s market should appreciate in value simply from recent growing conditions in some regions of the Corn Belt. In many years this probably would happen, but the fact the United States has an abundant old crop supply of both corn and soybeans is preventing a rally from taking place. The fact that yield reports are scattered all over is also preventing futures from rallying. At the present time the low end of yields would cause values to rally, while the high end could leave the market open to down-side risk.
There is a concern that is taking shape with the corn crop in Eastern states. Some of these states received 400 percent of their normal rainfall in June, and then twice that volume in July. As a result, there are concerns over how much nutrient value may have been lost from saturated fields. In turn, some analysts believe corn yield has been jeopardized as well.
The only consistent factor with this year’s crops appears to be inconsistency. This is not uncommon, but the difference in crop conditions this year is one of the widest seen in recent history. It is not uncommon to see wide variances in crop conditions from not just state to state, but in fields that are right next to each other. This variability is making it more difficult to predict final yield than in many years.
The firm F.C. Stone has released a model that shows what we could see for an average U.S. corn yield this year. There are several field scouts who believe the Iowa corn crop will average 185 bushels per acre this year. Historically, the average U.S. corn yield is 90 percent of the Iowa yield, which would be 166.5 bushels per acre. This is nearly equal to the figure that is being used in several supply and demand reports.
Trade is also looking forward to next year’s corn yield possibilities. Right now, most analysts are predicting a corn yield between 164 and 166 bushels per acre for a national average this year. Given current usage this would drop new cropending stocks to a range of 1.7 to 1.9 billion bu. While this would not be a significant factor this year or next, any future production issue and we could easily see a rationing situation develop in the 2019 marketing year.
While weather has undoubtedly affected this year’s crops, there are other factors that may have reduced yield as well, particularly in corn. These include plant disease and insects. The mild winter across much of the Corn Belt has been followed by a warm, humid growing season, which are perfect for the development of both fungus and insects. One that is getting the most attention is rust, which can reduce corn yields by as much as 30 percent.
Not only can these factors affect yield, but possibly storing the crops as well. Any fungus that is in the corn crop when it is harvested can easily make its way into storage bins this fall. There are also concerns over the unevenness in this year’s corn crop, and how it could lead to staggered maturity. This may require extra drying this fall, and add to a producers cost of production as well.
New crop acreage is already starting to be debated in the market. This is centering on the Upper Plains where it is thought acres will shift back to wheat from row crops, especially in the Dakotas. Not only is this decision being based on the rally we have seen in spring wheat values, but also from a tendency for wheat to better tolerate weather in that region. There is little doubt this would impact U.S. balance sheets, especially on soybeans.
There remains a large amount of interest focused on Brazilian corn and soybean movement. Farmers in Brazil seems more willing to sell corn when needed and store as many soybeans as possible. This has been a great benefit for old crop soybean sales out of the United States. New crop soybean sales are low though, as import buyers are waiting to see where movement increases first before extending bids.
This storing of corn and soybeans in Brazil is generating some questions in the global market. The main one is what is taking place with quality. Storing corn and soybeans is a new concept for many farmers in Brazil, and it is unknown as to how well they will monitor their inventory. Given the fact much of the inventory is being held in temporary storage is also concerning to some buyers. Even with a lower asking price, this may keep some buyers coming to the U.S. for needs.
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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