‘There is still a lot of uncertainty ahead’
By KRISS NELSON
The June World Agricultural Supply Demand Estimate (WASDE) from USDA can be considered one of the reports that tend to see the less change from the month prior and this year is no exception.
Todd Hultman lead analyst for DTN said this year, there is one difference and that is from the domination of the markets from coronavirus.
“That has really hit the demand side of markets in a very tough and devastating way,” he said. “Here we are, entering June and we are just starting to see signs of those coronavirus concerns easing a bit. At least for the summer months. For that reason, more than anything gives us a little more interest in the June report than we usually get.”
He also reminded the estimates USDA puts out are very early in relation to the new season.
“It is going to be 14 months until we get to the end of the new 2020, 2021 season. There is a lot of uncertainty yet about the estimates that USDA is putting out,” he said.
Hultman looked at the past 22 years of estimates and how they relate to the final average farm price turned out, the correlation of the June WASDE estimates are actually very low.
“That is a statistical reminder that there is still a lot of uncertainty ahead,” he said. “Certainly weather is a big part of that, but also things like trade relations with China and other topics. These June estimates are never set in stone. We have a long way to go and there’s a potential for surprise ahead.”
A survey from North Dakota was considered when USDA made their supply and demand estimates for the current season.
“As you recall, North Dakota had a very tough harvest conditions last fall,” he said. “They had a lot of corn kept in the fields over the wintertime and even now some fields are just getting harvested from 2019.”
Due to this, Hultman said there was a minor reduction of 46 million bushels (mb) for that North Dakota corn, bringing the U.S. corn production estimate down to 13.62 billion bushels (bb).
The only other old crop change Hultman noted was the ethanol demand that was reduced 50 mb, down to 4.9 bb.
“As you know, ethanol production is still down about 24% from a year ago as of the latest figures,” he said. “Driving demand is coming back, it’s not as sharply lower as it was just over a month ago, but the return has been slow and we have lost substantial corn demand to the loss of ethanol production.”
New crop estimates for the 2020 season in corn, Hultman said is just under 16 bb with a trend line yield expected of 178.5 bushels to the acre.
The report showed slightly higher ending stocks of 3.32 bb which works out to a 22% of ending stocks to use.
How does this new ending stocks estimate work out in terms of what we can expect for prices?
Hultman said a 22% ending stocks to use ration points to a history of corn prices in about the $2.50 range.
“Corn supplies don’t normally get this heavy as we are expecting in the fall, but again, a lot of it is going to be dependent on weather and how well corn demand rebounds or doesn’t rebound,” he said. “We still have quite a bearish outlook for corn prices moving ahead.”
As for world estimates USDA has for corn, Hultman reminded that we are dealing with two seasons because South America is still caught up in the 2019-20 season.
World ending stocks have been estimated at 312.9 million metric tons (mmt). There was no change for Brazil’s crop as they are still expecting 101 mmt. There was also no change for Argentina with 50 mmt.
The new crop world ending corn stocks estimates for the new U.S. crop saw a modest reduction, down to 337.9 mmt.
“There was a one million metric ton increase in the estimate of Brazil’s crop for the new crop season, but keep in mind, that’s such an early estimate. Brazil doesn’t even plant until this fall, so that is quite a ways off and not a significant concern for corn prices right now,” he said.
As far as the export process in the current season, we are now in week 41 with 11 weeks to go, with some progress in recent weeks.
“Corn exports, right now, are showing steady improvement,” he said. “We are about 20 million bushels below pace of what USDA is estimating. We started deeply in the hole. Our corn shipments are still in the hole, somewhat. The current pace of shipments that we have been seeing lately is going to have to keep up to reach up to that USDA export estimate.”
Hultman said given the big hit to corn demand this year, the current national index for corn prices is $3.03, which is 23 cents below the July contract.
“That actually puts us pretty well above the five year average basis, which I find a bit remarkable considering the demand problems we are having,” he said.
Just last month, Hultman said we spiked lower and dipped below the five year average for a brief time.
“We have had quite a rebound since then,” he said. “Slaughter pace is picking up and driving demand levels are helping that ethanol production get going again. It is slightly encouraging to see a better than average basis for corn prices right now around the country.”
Hultman said there was a slight reduction in the production estimate for the current season for soybeans -just 5 mb. That reduction is attributed to the survey received from North Dakota.
Soybean crushing estimate for the current season saw an increase to 15 mb, but the export estimate came down 25 mb, resulting in ending stocks for soybeans in the current season increase from 580 mb to 585 mb.
USDA chose to bring down the export estimate 25 mb in the June report.
Hultman said as with corn, USDA kept the new crop production estimate unchanged for soybeans at 4.12 bb with a yield of 49.8 bushels to the acre.
“None of that was a surprise,” he said. “Normally we don’t get much new information in the month of June to change that original May estimate.”
For crush demand in the new crop season, Hultman said there was a 15 mb increase to 2.14 bb.
The USDA’s ending stocks estimate actually came down 10 mb this month, Hultman said from 405 mb to 395 mb.
A new crop soybean export estimate of 2.05 bb, Hultman said is a very aggressive demand estimate.
“I would say it is optimistic and especially given the contention that we go back and forth on China, so that will be a big question mark as we move ahead,” he said. “But right now, there was a slightly bullish change for USDA to bring their ending stocks estimate down to 395 million bushels which is 9% of annual use.”
How does the 395 mb estimate look in terms of what we can expect for soybean prices?
Hultman said the actual history of cash prices has traded anywhere from $6 to $15 a bushel.
“I know that is an incredible wide range, but that is just how loose this correlation is between prices and USDA estimates,” he said.
The statistical center of that history, Hultman said puts prices right about $10 cash.”
“If that 395 million bushels actually held true, that would be a pretty strong bullish influence for soybeans,” he said. “The real test though, and what nobody confidently knows at this point is if that 395 million bushels ending stocks estimate will hold true or not. At least on the horizon there is a little hope of higher prices, but some things have to work out to make that 395 come true.”
For world estimates for soybeans, Brazil’s estimate was unchanged at 124 mmt.
“I think that was a bit of a disappointment,” he said. “Because some more local, private estimates have come in lately with lower crop estimates for Brazil, but USDA kept theirs at 124 for now.”
Argentina’s estimates were reduced 1 mmt from 51 mmt to 50 mmt.
“Argentina is dealing with some dry weather conditions late in their season,” he said.
Another issue to note, Hultman said is China’s soybean imports estimate was increased 2 mmt to 94 mmt for the current, old crop season.
“That’s interesting because we have already seen China be a very aggressive buyer of soybeans from Brazil and they are just starting to turn and show more interest now in the U.S. because our U.S. prices are cheaper,” he said.
For the new crop soybean season, which has not even been planted in South America yet and is just getting underway here in the U.S., USDA reduces its ending stocks estimate from 98.4 mmt down to 96.3 mmt.
“That was slightly less than expected and no major changes in the estimates there,” he said.
China’s soybean import estimate in the new crop season was unchanged at 96 mmt.
“It will be interesting to follow that one in the months ahead as we learn more about China’s actual demand,” he said.
Hultman said there has been some good news in terms of soybean exports.
“Not only did we have a good week to report, there was also news China bought another 24 million bushels of new crop soybeans,” he said. “The current season – it’s a little tough to get business there. China is mostly interested in the fall soybeans right now.”
In the old crop export estimate, China lowered that to 165 bb.
“With our commitments, the way they are currently, projected to be just under 1.65, we are about 24 million bushels below pace by my count right now,” he said.
Soybean crush continues to be one piece of good news through the trade dispute and this year’s coronavirus situation.
“Crush demand has held up very well,” he said. “We saw increases in the crush estimate in today’s report.”
The crush premium for soybeans has been slowly coming down lately, however, at about 16% is still above 10 year average.
Hultman said China has been an aggressive buyer of Brazil’s soybeans, but there is a healthy indication those Brazilian soybean supplies are getting tapped out.
“Not only are they at their highest prices in five months, they are about 43 cents above where U.S. soybean prices are at the Gulf,” he said. “This is one of the better indications we have that we do anticipate seeing more Chinese soybean business here in the month ahead. And we have certainly seen a fairly strong pickup just in the last week or two.”
U.S. daily coronavirus deaths
Hultman recognizes coronavirus deaths in the United States are a morbid topic, but looking at the data, it seems the death count has been coming down as we are getting closer to the summer months.
“I am not making any predictions, or anything on how things will go this fall or winter,” he said. “It is just showing that this is really accompanied a lot of the demand improvement that we have seen of late of corn and soybeans. This is somewhat of an encouraging factor, depending on how this plays out. This is one black swan that nobody expected this year, but it has had a dramatic impact on our grain prices and all of our ag prices.”
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