New challenges for demand
By KRISS NELSON
The USDA released their World Agricultural Supply and Demand Estimates (WASDE) report for March and although it didn’t bring any big surprises, it did leave a lot of questions as to what the recent coronavirus pandemic will do for the agricultural industry.
“This is kind of an unusual WASDE report,” said Todd Hultman, DTN lead analyst. “It seems like we are setting a little trend here this year. The February report is usually quiet, but we had a little extra activity because of phase 1. We also have some extra activity going on because of coronavirus and that was my big concern today -would USDA reduce export estimates in corn and soybeans because of the coronavirus situation?”
Hultman said USDA did not change any supply or demand estimates for corn, soybeans or wheat for the March WASDE report.
“Everything we saw in February as estimates go for the U.S. crops still stand in the month of March,” he said.
Ending stocks total for the U.S. remains at 1.89 billion bushels (bb) which works out to a 13 percent ending stocks to use ratio.
“We knew the production estimates would not change in the March report there was no basis for that. We are still waiting for USDA to come out with a new survey of corn and soybean production in the northern states but that has not happened yet in the March report, said Hultman.
How does this look in comparison to historical cash corn prices?
Hultman said in the previous 23 years when USDA estimates a 13 % ending stocks to use ratio as they are now, cash corn prices typically traded somewhere between $3 and $5, with the statistical center at about $3.90 a bushel.
“The current national average cash price for corn is right around $3.60. We’re undervalued according to historical standards and where supplies are currently estimated at about 30-cents a bushel,” he said.
Hultman said he attributes this to two things.
First, he said being the concerns for coronavirus and the other concern to keep in mind for corn, is in February, USDA estimated 94 million acres of plantings with some private estimates going up as high as 96 million acres.
“If that comes true, that is going to give us higher ending stocks of corn supply in the fall,” he said. “Of course that is all dependent on weather being cooperative and so forth. There are a lot of unknowns about the new crop situation to hit, but the early outlook is bearish and that will take away somewhat from the current corn price.”
All demand items for U.S. corn also stayed the same.
“Whether it is feed demand, ethanol demand, exports they are all the same as a month ago,” he said.
On the world supply and demand estimates for corn, Hultman said there were a few minor changes. Most notably was South Africa, who came in with a higher crop estimate of 16 million metric tons (mmt) which is up 1 1/2 mmts from a month ago.
“South Africa is not what we consider to be one of the main sources of competition for U.S. exports, but they do export a little and they’re export estimate was also increased by a half of a million metric tons up to 2 1/2 million metric tons,” he said.
The Ukraine crop estimate did not change this month, but USDA did increase the export estimate from Ukraine from 31 to 32 mmt.
“We have slightly higher export competition in this report,” he said.
The USDA’s estimate of world ending corn stocks increased slightly, Hultman said from 296.8 mmt to 297.3 mmt.
“Probably the most noteworthy thing is the increased export estimate from Ukraine,” he said.
Hultman said Brazil is getting to close to completing the planting of their second corn crop.
“We have to say that even though parts of southern Brazil have concerns of dry areas overall, the second crop in general seems to be off to a favorable start,” he said. “It’s still early, weather is still a concern to monitor, but, so far, that South American crop is off to a good start when it comes to Brazil.”
U.S. corn exports, Hultman said are down 45 % from a year ago.
“We started off the year in a deep hole and we are still in a bit of a hole,” he said. “We’re not competing with Brazil so much anymore on old crop corn exports as their supplies have run down, but we still have some competition from Ukraine and just coronavirus concerns in general. That seems to be the tough challenge for corn exports right now.”
The corn basis, Hultman said overall remains strong throughout the Midwest with some of the highest corn premiums for corn being found in the eastern Midwest.
“I think it’s very encouraging that the basis, overall, remains strong when we look at cash corn prices around the Midwest,” he said. “Even though corn prices have been under pressure here early in 2020, and largely due to the coronavirus concern, we still maintain a very, I would say stout demand situation in the interior of the country and that continues to show up in the favorable basis prices that we see.”
The U.S. ending stocks estimate from USDA in soybeans remains at 425 million bushels (mb).
“That’s the same as a year ago. The crush demand stayed the same, the export estimate of 1.25 billion bushels stayed the same and again, that was a little surprising to me,” he said. “I thought USDA would probably make some allowance for the coronavirus concerns, and that will probably show up in a lower export number, but USDA chose to make no change at this time.”
As far as the world estimates go, for soybeans, there was a 1 mmt production increase for the estimate for Argentina and for Brazil.
“Interestingly enough, even though USDA estimated a slightly larger crop for both of those countries, they did not change the export estimate as far as competitive pressure on the U.S., that did not change in this report,” he said.
The overall world ending stocks estimate increased from roughly 99 mmt to 102.4 mmt and this was largely due in part from the crop estimate increases in Argentina and Brazil.
“But, there was also a 1 million metric ton lower estimate for world soybean demand USDA factored in there also. There was kind of a two sided effect,” he said. “The larger crop estimates had the most explanation for today’s higher ending stocks estimate.”
Currently the ending stocks to use ratio is at 10%. In previous times with this estimate, Hultman said soybeans traded anywhere from roughly $6 to $14.
“That is a very wide range and we are dealing with a very emotional market as we can tell right now in today’s current situation,” he said, adding the statistical center for prices comes in at $9.80 a bushel.
“I think it’s interesting that USDA’s average farm estimate for the current season is $8.70 we’re given a pretty good discount there and I would guess that is related to the coronavirus situation that they have in mind here,” he said. “Even though they didn’t lower the export estimate, they are keeping that cash farm price estimate quite low.”
China has been aggressively buying soybeans, Hultman said, but unfortunately mainly from Brazil and only slightly from the U.S.
“Right now, Brazil continues to have the advantage when it comes to gaining the export business, and because they have a record crop that is being harvested, that advantage is likely to continue to at least, through summer to September, if not October, it’s going to be a bit tough for the U.S., I think, to generate export business until we get deeper into the fall,” he said.
Hultman said U.S. export commitments for soybeans are down 13% from a year ago.
“We continue to see some suffering due to the trade war situation, even though we had the phase one agreement signed in January, we still need a price advantage to win that Chinese business. There is a clause in the agreement that basically says China doesn’t have to buy unless it’s in their commercial interest, so, that price advantage is probably not going to show up in the U.S. until October or so, and that’s when we look for the hope of better soybean sales.”
The U.S. soybean crush, those premiums, Hultman said are still enticing.
“We have seen this for quite awhile now, the domestic demand for U.S. soybeans, as far as having an incentive to crush beans into meal and oil, remains high,” he said. “It’s about an 18% premium over the cost of the soybean price itself.”
Exports remain the primary concern for grain demand during the coronavirus situation.
“I heard an economist say, and I think he pinpointed the situation very well, that it’s not really the growing number of infections we hear about or the growing death count that we hear about related to coronavirus that’s causing the market’s biggest concern. The biggest market concern is coming from the lockdown from human activity across the globe and the fact we are all pulling back. We are traveling less. Those shipments of grain are going to be more difficult. Nobody wants to show up at the dock to receive something that came from a foreign port. All of those practical things of pulling back in a time of fear is what has the negative effect on our markets,” he said.
To look on the brighter side of things, Hultman said there are still nearly 7.8 billion people in the world that do not have coronavirus.
“At some point today, they’re going to be hungry, and they are going to eat something and they might even have more than one meal per day, as many of us will,” he said. That underlying food demand habit is not likely to change, but, there will be logistical hurdles to get over and as you think about feed demand and food demand, we are going to see a time where, because of transportation and quarantine issues, it’s difficult to shift the grain, but, because the underlying demand continues to be there, it may also be true we see heighten purchases after things stabilize.”
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