Crops face mixed weather influences
By KRISS NELSON
The World Agricultural Supply and Demand Estimates released July 10 from USDA brought slightly lower than expected new ending stock totals for the three big grain crops.
The July report, according to Todd Hultman, DTN analyst is also the report where weather and its potential impact on the crops is finally considered.
“Obviously weather is still a big risk for the corn and soybean market at this time,” said Hultman. “And by risk, I mean there’s volatile potential to go either way.”
For soybeans, the big concerns continue to be trade with China, and of course, those issues are probably not going away anytime soon.
“But, we do have a little bit of comfort right now in that it looks like Brazil’s soybean supplies are tapped out or at least low enough encouraging more trade to come our way and that should be the case in the next few months,” he said.
Hultman said we knew from the grain stocks report that was released on June 30 there were going to be some demand reductions due to the fact that more corn stocks were available on June 1 than were expected.
The reductions came in the feed and residual account, which were dropped 100 million bushels (mb) down to 5.6 billion bushels (bb). Ethanol demand was also brought down 50 mb in the old crop season.
“Total demand was reduced by 145 million bushels, so those two changes right there explain most of it,” said Hultman.
The new ending stocks total for the old crop season, Hultman said is now 2.25 bb. The USDA is giving an average farm price estimate of roughly $3.60 a bushel for the remainder of the 2019/2020 season, which ends Aug. 31.
For the new crop numbers, Hultman said the corn crop estimate has been reduced form nearly 16 bb down to 15 bb. This drop he said comes largely from the lower planting estimate we received on June 30.
On the feed and residual account on the new corn crop side, there was another reduction. This time, of 200 mb.
“Between the two seasons, they reduced the feed and residual by a total of 300,” he said. “They put 100 of it on the old crop side and 200 of it in the new crop side.”
The new ending stocks to use estimate for 2020/2021 is 2.648 bb.
“That is slightly less than the 2.73 billion bushels that was expected,” he said, adding the USDA’s average farm price estimate for the new season is $3.35 a bushel.
World estimates for corn, Hultman said, just as the ending stocks total, came down for corn.
The June ending stocks estimate of nearly 338 million metric tons (mmt) has dropped to 315 mmt – a more favorable world ending stocks total.
How do these new ending stock estimates look as far as what we can expect for prices?
The new ending stocks estimate of 2.65 bb, Hultman said comes out roughly to an 18% of annual use. Historically, that ratio gives us an average cash corn expectation of about $3.00 a bushel.
“It has ranged into the low $2 when we’ve had this much supply,” he said, “But, I guess it’s not as bad as 22 percent we were looking at just last month.”
The old crop season came in with a 16% ending stocks to use ratio.
“That was higher than expected and obviously the ending stocks were increased in that very tough quarter where we got hit with coronavirus and an economic slow down,” he said. “The old crop total has gradually been increasing most of this year.”
At the time of the report, the corn exports estimate stayed at 1.775 bb, which Hultman said is 144 mb below pace.
“But, we have to acknowledge the shipment pace has actually been on target lately and it’s been keeping up with the weekly requirement,” he said. “There is a good chance the export estimate will hold up or be close at least, by the time we get to the end of August. We don’t see a big risk to the export estimate at this time in corn.”
Hultman said a lot of this market right now is very sensitive and very keenly aware of every change in the forecast of the weather right now.
“With the speculators and the funds heavily short at this time, they are vulnerable to more short covering if this crop gets seriously threatened,” he said. “But, that is the big question and the big if of the moment.”
The July WASDE report brought no changes in the yield estimates for corn, as Hultman predicts USDA doesn’t have much evidence to change away from their trend line estimates, but that could change.
For the 2019/2020 U.S. soybean crop, Hultman said there is a slight increase in the soybean crush total.
“We’ve talked about soybean crush being one of the brighter spots for soybean demand the past couple of years,” he said. “Even though those crush premiums are normalized now, down to more normal levels, the crush has been running about 3 percent from a year ago, so today’s adjustment puts it right, in my opinion, where it aught to be.”
The old crop export estimate for soybeans, Hultman said was unchanged at 1.65 bb.
The shipment pace, Hultman said is actually ahead of schedule.
“We are 63 million bushels above pace,” he said. “The concerning part of this is the shipment pace has slowed the past couple months, so I think it’s going to be a real struggle to see how we come in by the time we get to the end of August if we are going to make that 1.65 billion bushels or not. So far, we are a little ahead of the game, but that shipment pace has been concerning as slow as it is.”
The change of the day, he said came in the residual demand, which was reduced by 50 mb down to a negative 46.
What is residual demand?
“Sometimes it’s anything USDA wants it to be,” he said. “Typically it’s an adjustment factor when we go through and find grain stocks as we did on June 1 sometimes there is a bit of an adjustment to bring WASDE numbers back in line and I think that is what we are finding here.”
Ending stocks estimate for the day in the old crop side increased to 620 mb.
“That was a 35 million bushel increase and largely because of the residual adjustment that USDA put in there,” he said. “Obviously that 35 million bushel increase is going to be added also in the new crop season.”
USDA estimated a 2020 soybean crop at 4.13 bb, which was slightly higher than what was given last month, but slightly less, Hultman said than what was anticipated by analysts.
We also saw an increase in the crush estimate of 15 mb on the new crop side as well.
“That’s up to 2.16 billion bushels now,” he said. “We have a crush increase on both the old crop and the new crop seasons.”
There was no increase in the soybean export total in the new crop season of 2.05 bb.
“That is a pretty aggressive estimate,” he said. “It is going to require more cooperation from China and of course that remains a big concern and a big question mark at this time. One of the challenges for soybeans in the new crop year will be to see if we can actually obtain that high of an export estimate.”
Taking all of these adjustments into account, the new ending stocks for soybeans is 425 mb, up just 30 mb from the June new crop estimate. The USDA is suggesting an average farm price of $8.50.
There was a slight reduction in the world numbers for soybeans.
“USDA reduced their estimate from 96.3 million metric ton down to 95.1 million metric ton. That was slightly less than the trade was expecting,” said Hultman.
The other number Hultman says he pays attention to is the USDA’s estimate of China’s soybean imports.
“So far, that number held steady at 96 million metric tons for both the new crop season and the old crop season,” he said.
The ending stocks estimate for old crop soybeans, Hultman said inched up to 16% of annual use, which gives us a target of prices in the upper $7 to $8 a bushel for cash soybean prices.
The new crop season, however, is a much lower ending stocks to use ratio, coming in at 425 mb, which is 10% of annual use.
“That actually suggest a cash soybean price of $10 a bushel,” he said.
However, there is a wide range of historical prices at that 10% mark anything from $5.50 a bushel up to almost $13 to $14.
“Obviously that is a very wide, volatile range,” he said. “But, it points out how emotional markets are. That is the main thing in my mind.”
There are other things happening in the world, and of course, the two biggest bearish concerns, Hultman pointed out are the coronavirus and the affects it is not only having on the U.S. economy, but the global economy at large and the trade relations with China and how that all plays into our U.S. soybean demand and the price we will receive.
“I would say we have to keep in mind the larger perspective. This is a very tough macro environment to expect that $10 cash soybean price,” he said. “Keep in mind though, at this supply level, that is what typically would be pointed to is a $10 average.”
Trade with China
Trade relations with China, Hultman said is such a big part of what we can expect about U.S. soybean demand in the year ahead.
According to the U.S. Census Bureau, China’s imports of U.S. ag products from Jan. to May, 2020 totaled $6 billion; versus $5.5 billion worth a year ago.
“As you can tell, at this pace we are a long ways a way from the $36.5 billion target that was suggested in the phase one trade agreement,” he said.
Specifically for soybean imports, China imported $1.25 billion of U.S. soybeans, which Hultman said is just a little over half of where they were at a year ago.
“That early pace is really slow and keep in mind, they have made sales since then and they do have sales of 155 million bushels of new crop soybeans which are significantly higher than a year ago,” he said. “It’s the late summer to fall period where the U.S. really has an advantage and a shot at gaining more of China’s soybean business. That will be the critical period to look forward to as we move ahead here the next several months.”
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