The USDA unexpectedly increased corn yield in the September supply and demand report to 169.9 bushels per acre, which was 4/10ths over the August estimate. This was enough to cause a build in corn production by 32 million bu. At the same time the USDA cut corn demand by 50 million bu on new crop, which over-shadowed a 20 million bu increase to old crop usage. This was enough to push new crop ending stocks to a comfortable 2.34 billion bu, and weigh on the market.
Data surrounding the soy complex was just as negative. The USDA increased soybean yield by half of a bushel per acre to a 49.9 bushel average, causing production to jump 50 million bu. This was off-set by increases to demand totaling an equal amount. New crop soybean carryout was left unchanged at 475 million bu while nearly the entire market had been expecting a decrease.
No changes took place to wheat balance sheets in the September update. This kept new crop reserves at a comfortable 933 million bu.
Many traders are already looking past these numbers and focusing on the final yield data. In each of the past two years both corn and soybean yield has increased from the September estimates to the final numbers. These increases were the result of favorable weather to finish out the growing season. Late season conditions this year were not as favorable for production though, and many analysts are not expecting to see another year of increases.
Now that we have passed the monthly supply and demand report, trade will quickly revert to monitoring fall weather outlooks. The primary concern will be any forecast including the first frost or freeze for the Corn Belt. Trade will also be monitoring outlooks to determine what conditions will be for the upcoming harvest season. Delays would have to be significant this year to impact the market though, as we are in no danger of depleting old crop reserves.
Soybeans originating from the United States are now some of the most competitive in the global market, which has greatly supported that complex. We are now seeing corn become just as competitive. U.S. corn is more affordable that that from South America, as transit costs are rising in those countries. Farmers in South America also need to recoup their cost of storing corn, which is further elevating their asking prices.
Hopes are these favorable values on U.S. corn and soybeans will jump start a struggling new crop export program. New crop corn sales are currently the lowest in the past twelve years. New crop soybean sales are currently just half of what they were a year ago. While there is plenty of time for these numbers to improve, the longer it takes, the slower the market will be to react.
Country movement of corn and soybeans remains lethargic as we near the new crop harvest. Some regions have seen elevated deliveries as producers make room for new crop bushels. Thoughts that yields may be better than initially thought are leading to elevated movement as well. Producers are only marketing what they absolutely need to though, as many believe futures will rally once harvest begins.
We continue to hear reports of high variability in this year’s crops. One reason for this is weather, but there are others, including land quality. It is not out of the question this will be a factor when land rent is negotiated in the future. It is also possible we could see an increase in enrollment in the Conservation Reserve Program on less than perfect acres as well.
While harvest is beginning in the United States, soybean planting is starting to get underway in Brazil. Dry soils are being reported across much of Brazil, which is limiting field work to start the season. This really is not a significant factor yet, as planting is not delayed. This is still a development trade will monitor, with any hint of adverse weather likely to bring speculative buying in the market.
One such development could be the building La Nina weather event. The U.S. Climate Prediction Center has released a statement that there is a 55 to 60 percent chance of a La Nina weather system building this winter. In most La Nina years commodity production is reduced in Southern Brazil and Argentina. If this system carries over into next spring it could impact U.S. production as well. As a result, we have seen a build in weather related risk premium in the futures market.
The big question when it comes to a La Nina is how strong the pattern is if it does develop.
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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