Bearish shock to corn in August’s WASDE report
By KRISS NELSON
Hopes for a more positive World Agriculture Supply and Demand Estimate (WASDE) report from the USDA were crushed on Monday when the planted corn acres estimate wasn’t lowered to expectation.
“This has been a long awaited report from USDA ever since the acreage estimate for corn at 91.7 million acres back on June 28. We have been waiting for this second survey, hoping for a little more constructive number,” said Todd Hultman, DTN grain market analyst. “We finally got that today, but I am sorry to say, we don’t have much good news when it comes to corn prices for at least grain producers.”
Corn prices dropped the limit 25 cents after Monday’s report.
USDA’s corn acres planting estimate came in at 90 million acres (ma), which is up close to a million acres from a year ago.
“That is not much drop in corn at all in spite of very difficult planting conditions this spring,” said Hultman. “The big drop this year came in soybeans.”
Instead of 89 ma of soybeans planted like last year, USDA took that estimate down to 76.7 ma.
“That was less than expected,” he said.
The wheat estimate, Hultman said, stayed at 45.6 ma.
“One of the interesting things about this is, if you look at the three crop (corn, soybeans and wheat) total for 2019, we are down to 212.3 million acres. That’s almost 14 million acres less than what we saw in 2018. So, yes, the difficult spring planting conditions did impact planting this year, but it basically impacted it exclusively for soybeans,” he said. “That is what USDA’s report is telling us today.”
Preventive planting acres
Preventive planting estimates came out from Farm Service Agency (FSA) on Monday as well.
“This is really a bit of a side note,” said Hultman. “The planting estimates from the WASDE report are the main thing we needed to know as far as prices and how the market would react.”
How many preventive planting acres were there?
Hultman said FSA’s first estimate of the year, which will be adjusted monthly, is showing there are 11.2 ma of corn prevented acres that were turned in versus the 4.35 ma of prevented soybean acres.
“Both of those numbers are far more than anything in recent history in the three crop total. When you add wheat’s two million acres in there, it comes to 17.8 million acres for the three crop total. So, obviously, yes, they are showing that it was a devastating spring for planting, it’s not like any other season we have seen, but the way it shifted out certainly wasn’t how we expected in terms of corn acres staying at 90 million acres,” he said.
Supply and demand estimates for corn
USDA’s corn crop estimate for 2019 is 13.9 billion bushels (bb), which is based on the planting of 90 ma of corn.
“They only came down 1.7 million acres on their planting estimate here in the month of August and they actually also raised the yield estimates slightly,” he said. “This corn crop estimate of 13.9 billion bushels is definitely on the bearish end of expectations and corn prices are getting hit today and it’s also just really dominating the entire trade in grain today.”
The yield estimate is 169.5 bushels to the acre, which is up from last month’s 166 bushels to the acre.
“We haven’t got into the field yet, as far as yield estimates go on USDA’s report,” said Hultman. “Typically that used to start in August. This year, it changed. USDA is not going to give a field estimate of their yields until the September report. That could bring an adjustment according to what they find there.”
Hultman said there were also some demand adjustments that were a bit bearish.
“It’s not a surprise, the ethanol demand was adjusted down 25 million bushels. That is actually just a slight adjustment for ethanol. We have talked quite a bit about profit margins on ethanol are really straining this year,” said Hultman, adding the EPA just granted 31 new waivers to refineries which allows them to not have to meet the mandate for producing their required ethanol amount.
Corn export totals were reduced 100 mb for the new crop season.
“That is not a surprise as corn prices got up above $4 it really shut off demand for our exports,” he said.
The old crop export total was kept at 2.1 bb.
“That’s a bit of a surprise,” he said. “But that will probably get adjusted lower, perhaps next month.”
Ending stocks total for the new crop came in at 2.18 bb, which is slightly up from last month’s estimate.
“There is still a lot of corn, and as far as those that need to buy corn, it’s going to ease their concerns that there is no urgency that they need to rush out and buy anytime soon,” he said. “This takes care of supply worries on their part.”
The percentage of annual use of the new ending stocks estimate is now roughly 15 percent, Hultman projects.
“That’s a slight improvement from a year ago, but still very high levels,” he said. “You can imagine our price expectations are going to go down to the trading range that we have seen the past four, even five years for corn.”
Hultman said with a 15 percent ending stocks to use ratio, the range of cash corn prices, where it has traded in that range in the past, could go anywhere to the high end of $2 to the mid $4 range.
“There’s quite a variation, but the statistical center of that relationship puts us right about $3.40 to $3.50 a bushel. That is national average cash prices. As you know, cash corn prices are spread out all over the country right now,” he said.
World corn crop numbers with the U.S. production coming in higher than expected, of course, also came in higher than expected. Ending stocks for the world were increased from roughly 299 to 307.7 million metric ton (mmt).
World demand for corn was also reduced by almost 6 mmt.
As far as production, there was an increase in the crop estimate for Ukraine. According to Hultman, that country is up to 36.5 mmt from 34 mmt.
“That is a sizeable increase in their crop estimate,” he said. “Their weather has been doing very well this year.”
How are the exports going?
Hultman said corn exports have slowed dramatically in recent months. USDA export estimates still held in there at 2.1 bb on Monday’s report.
“Right now, the way things are going, we are projecting 2.02 billion bushels in the current season, which ends in just two weeks from now at the end of August, so we are not far away and we are just not reaching that export estimate yet,” he said. “There is expected to be a reduction ahead.”
New crop corn sales are going poorly at this time.
“Early sales are down 48 percent from a year ago and, of course, that is related to Brazil and Argentina both having big crops and the U.S. corn prices just being priced very high right now. We haven’t been doing well in exports as of late,” said Hultman.
How does corn compare to prices in Brazil?
“Right now, not very good,” said Hultman.
Brazil prices on the Free On Board (FOB) basis at their ports is 43 cents cheaper than what U.S. prices are in New Orleans.
“That is largely the main reason why we have seen such a drop in export activity for corn,” he said. “As corn prices come lower, of course, that will get more competitive, but that’s what we have been dealing with the past few months.”
The new crop numbers for soybeans’ new planting estimate was 76.7 ma which is less than the 80 ma USDA estimated a month ago.
“That is a surprise and if we can try to make sense out of what the second survey from USDA is telling us, it seems to be the story that as tough as planting was this spring, all of the efforts were made to get the corn in and it was the soybeans that farmers gave up on,” he said. “That’s not believable in my mind. I am still shocked by the 90 million acre corn number and we will see how good those acres are moving forward when we get more into the fields.”
The 48.5 bushel an acre yield estimate for soybeans is the same as it was a month ago.
“Really, USDA has no good reason to change the estimate. Not sure they had strong reason to change the estimate for corn, but that will be proved out better in September when those fields are surveyed and data becomes available,” said Hultman.
The new crop estimate for soybeans is 3.68 bb – a sizeable drop from last year’s 4.54 bb, according to Hultman.
The export total for the new crop season was dropped 100 million bushels (mb) to 1.775 bb.
“We had questions since the latest round of tariffs started up against China again and the two sides came as far a part as they have been since this whole dispute started,” said Hultman. “We were wondering would USDA show some reduced soybean demand estimates because of that? Well, they did drop the export estimate by a 100 million bushels.”
Ending stocks estimate for the new crop soybeans came in at 755 mb.
“That’s a significant drop from the 1.07 billion bushels that USDA’s expecting in the current season, but it is still a lot of soybeans,” said Hultman.
The world soybean estimates from USDA, Hultman said dropped from 104.5 mmt down to 101.7 mmt.
“That was slightly favorable,” he said. “That was less than expected on that world number.”
There was also a small drop in the world demand estimate for soybeans. Instead of 355 mmt, the world demand estimate for soybeans is now 354.3 mmt.
“That’s not a big drop, and it may surprise you to know, that still represents world record demand for soybeans. In spite of all of the concerns of African swine fever, USDA is still expecting world record soybean demand today,” he said.
Where the African swine fever situation does show up in the report, Hultman said is in the reduction of the import estimate for soybeans into China. That number has gone down from 87 mmt to 85 mmt in the new crop season.
In the old crop season, soybean import estimates were also reduced from 85 mmt to 83 mmt.
“Earlier last week, USDA made a case for lowering both of those numbers,” said Hultman. “This is not a total surprise given the whole situation with African swine fever continuing to be a problem, not only in China, but throughout southeast Asia and now perhaps in Eastern Europe.”
How do the soybean ending stocks look for the new crop season?
Hultman said the new ending stocks to use estimate is 19 percent, that’s an improvement from the 27 percent that was expected in the current season that is the difference between ending stocks over a billion bushels versus 755 mb.
“If we look to prior years, it is still a plentiful amount of soybeans that we have available,” he said. “This is not by any stretch of the imagination a tight supply situation. It is a welcome improvement from the excessive supplies we have built up in the old crop season, and of course, that’s what happens when we lose our No. 1 soybean buyer.”
History of soybean prices with a 19 percent ending stocks to use ratio usually get traded roughly in the range of $6 to $8 for that region.
“That is still a possibility of where we could see prices head, especially as we get closer to harvest and as the trade gets a little more confident about how big the corn and soybean crops actually are,” he said.
How are exports going for soybeans?
“They’re actually not doing so bad,” said Hultman.
The old crop export estimate remained unchanged at 1.7 bb.
“By description ‘not so bad’, understand that they’re already down sharply without China’s participation this year,” he said. “The total shipment projection has actually been keeping up fairly well lately. We’re just looking at 1.69 billion bushels – just under pace for USDA’s old crop estimate on exports. Probably won’t be a significant change from the exports.”
How are new crop sales going for soybeans this year?
“Well, not good so far,” said Hultman. “So far, they are down 67 percent from a year ago’s pace. There is no strong buying interest for U.S. soybeans at the moment.”
The one positive that remains for soybeans, Hultman said is the crush premium.
“We are still seeing a positive incentive,” he said. “The market is still offering a 19 percent return for crushing that August soybean contract. That’s still favorable overall for domestic crush demand. That is the good news.”
When there’s good news, it seems there’s always bad news.
“The tough news is that because Argentina had a bigger soybean crop this year, we still are going to have more competition from Argentina on that front,” he said. “They’re still looking at increased exports from a year ago that is the main point.”
Hultman said when comparing the FOB prices for soybeans at our New Orleans ports versus Brazil’s ports they are coming in 49 cents a bushel less.
“That helps us a little bit with non-Chinese business,” he said. “But, as we mentioned, we haven’t really seen much business for new crop soybeans as of yet.”
The fact there has been no process with trade dealings with China is the main bearish factor for soybeans.
“As long as that is on, it is very difficult market to expect a higher price in,” said Hultman.
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