A very bullish WASDE report
By KRISS NELSON
The markets responded in a positive way after last week’s World Agricultural Supply and Demand Estimate (WASDE) released by USDA for January.
“The good news is this was overall, a very bullish report for the markets,” said Todd Hultman, lead DTN analyst adding the markets brought corn up 25 cents and soybeans 51 cents for the day.
Hultman said there was a slight revision to the old crop season corn numbers, with USDA lowering the ending stocks by 76 million bushels (mb) to 1.92 billion bushels (bb). The change was the direct result of an increase in the estimate of the feed and residual demand.
New crop estimates for the 2020/2021 brought slightly lower beginning stocks, Hultman said, than what was expected.
“We have a lower crop estimate of 14.18 billion bushels on a lower yield estimate of 172 bushels an acre. Take the lower beginning stocks, lower crop estimate and that obviously is going to set the stage for lower ending stocks estimate of 1.55 billion bushels,” he said. “That was the surprise of the day. That was quite a drop from last month’s 1.7 billion bushels.”
What do these new ending stocks totals mean for an expectation in corn prices?
The 1.55 bb ending stocks estimate puts the ending stocks to use ratio under 11% of annual use at 10.6%.
Statistically, Hultman said that gives a target based on past corn prices of roughly $4.40 a bushel.
“If we really want a corn market to be able to support prices above $5 which is where they are close to being at now, we really need to see an ending stocks to use ratio of 7% or less and we just aren’t close to that yet,” he said. “Corn is obviously trading higher because of the tight situation of soybeans. Keep in mind, as far as corn fundamentals go for themselves, it is hard to justify the price levels we are at right now based exclusively on the corn supply situation.”
Hultman said there is typically some offset in the demand categories that are expecting some lower demand response to the higher corn price — and that was the case.
Feed demand came down 50 mb in the new crop season — now at 5.65 bb.
The ethanol estimate came down 100 mb to 4.95 bb.
“With coronavirus numbers not really showing improvement yet — even though we got the vaccines going, we are not seeing the pickup in driving activity,” said Hultman. “That will be the No. 1 boost that would really help the ethanol outlook, but we are not seeing that uptick yet.”
The third demand leg is corn exports. That was reduced 100 mb from 2.65 bb down to 2.55 bb.
“The year started with much bigger expectation after we saw some significant purchases from China in the summer to fall season,” said Hultman.
World balance sheet for corn
The new world ending stocks estimate for corn is just less than 284 million metric tons (mmt).
The estimate of China’s corn import, Hultman said was up 1 mmt to 17.5 mmt.
“That is reflecting somewhat of a higher corn need there,” he said.
The corn crop estimate for Argentina and Brazil were both reduced slightly.
“We have been talking this year about, especially in Argentina — they have had dryer than usual rain totals this year,” said Hultman. “A lot of that has been influenced by the La Nina weather pattern which remains strong and in effect. Dry weather continues to be a concern in Argentina for both corn and soybean crops moving forward.”
Hultman said there are some concerns with the upcoming planting of Brazil’s second corn crop.
“The concern for the second corn crop, which is Brazil’s larger corn crop, is that they might get a later than usual planting start this year because the soybeans that went in before them were planted late,” he said adding there was a 1 mmt reduction in Brazil’s crop estimate for this month.
China’s corn prices
Currently Hultman said China’s price for corn translates to roughly $11.18 a bushel.
“USDA has been over estimating corn supplies in China and they did that again today,” said Hultman. “They’re still estimating 192 mmt of corn surplus in China — which is over 7.5 bb. That is just not right. Not when you see corn prices in China trading over $11 a bushel. We know they don’t have that big of a surplus and I continue to say it is unfortunate that USDA continues to stick with this ending stocks estimate which are throwing world numbers out of whack when it comes to corn.”
Weekly corn sales to China, Hultman said jumped up very strong July through Sept. But since October, those corn sales to China have largely been small, weekly amounts.
USDA’s export estimate was 2.65 bb last month, but is now down 2.55 bb.
As of week 18, Hultman said there are corn sales on the books of 1.73 bb.
“We are off to a strong start,” he said. “The question is, looking at China’s corn price; does that strong price increase in China mean there will be more purchases coming from China? I did mention that USDA increased the import estimate from 1 million metric ton up to 17.5 — that is a little encouraging that they are recognizing this.”
Hultman said he finds it interesting we have not seen the kind of weekly totals that you might expect with such a strong bull market in China’s corn prices.
“You might have heard rumors earlier this fall — some were saying they were going to import 20 to 30 million metric tons of corn this year,” he said. “But, we are not seeing any activity like that yet. I can’t rule out the possibility yet either, because of that strong corn price we see in China. It appears to me, somewhat like pork, they are going to allow themselves to suffer some of the high prices and import some to ease the supply situation but maybe not as much as everyone expects.”
USDA’s ending stocks to use estimate for soybeans, Hultman said was reduced from 175 mb last month down to 140 mb today; bringing the average farm price cash estimate from $10.55 a bushel up to $11.55 a bushel.
“I would say they are still behind the curve on that price estimate. We have prices much higher than that now,” said Hultman.
Important thing to know about soybean stocks and the history is that anything less than a 5% ending stocks to use ratio gives very bullish potential.
“We have seen prices trade anywhere from $10 up to $18. $15 a bushel is very much in the ballpark of today’s situation. We are actually looking at an ending stocks to use ratio very close to 3%,” he said. “That is extremely tight historically speaking.”
How did the USDA predict such a low ending stocks to use ratio?
Hultman said for the crop estimates, USDA has a new yield report for the 2020 crop, setting it at 50.2 bushels to the acre, which is down half of a bushel an acre from last month.
USDA also reduced the corn crop estimate overall by 35 mb at 4.135 mb — that was very close to expectations.
USDA also released an import estimate of 35 mb to be imported in the current season.
“In other words, U.S. soybean supplies are getting so tight that, yet, we are probably going to have to import soybeans this summer,” said Hultman. “Even if Brazil has a big crop that they’re looking for, our demand has just been too strong — mostly led by exports, but also by crush.”
USDA increased the crush estimate for soybeans by 5 mb to 2.2 bb.
For the first time this season, Hultman said we are starting to see a hint of price rationing moving forward as the crush incentive is now down to its lowest level in six years.
“Before now, crush activity has been very strong. The first three months of this season we have seen U.S. crush totals up 7% over a year ago — that was very strong demand,” said Hultman. “But, as I say, we don’t have supplies to support that kind of increase. That is where we are starting to see this crush incentive really take a dive. That is something the market needs to do to slow that demand pace and ration out those supplies.”
World soybean numbers
As far as the world supply and demand estimates, Hultman said old crop numbers were not changed at all for South America. Soybean stock total for the world was reduced 85.6 mmt to 84.3 mmt.
Argentina’s soybean crop was reduced from 50 mmt down to 48 mmt — again due to dry weather concerns.
USDA kept Brazil’s soybean crop strong at 133 mmt, which is now very close, Hultman said to 4.9 bb.
“Brazil will continue to be the world’s largest producer of soybeans this year,” he said.
Import crop estimate for China, Hultman said was kept unchanged at 100 mmt.
“That is a lot of soybeans that China’s been importing,” he said.
Currently, the soybean price in China translates to over $18 a bushel.
China’s purchases of U.S. soybeans are now over 2.1 bb for this current season.
“That is why I say 2.3 billion bushel export estimate for the entire year seems pretty skimpy from USDA today,” said Hultman. “I understand they’re not trying to panic people, but I think it is fair to say, we haven’t really seen soybean exports shut off yet.”
As far as soybean sales to China, Hultman said ever since the weekly totals peaked in September, they have gradually been coming down, but are still very active.
“Especially when you consider we are in a tight situation where the U.S. really doesn’t have much of a surplus to offer. We have soybeans right now, but as you extrapolate out over the summer to the point we get to Aug. 31, again, that is why USDA is expecting us to import soybeans — the supplies just aren’t there, yet we do not see the purchase activity from China shutting off just yet.”
Commitments of soybean sales are 1.21 bb — up 84% from a year ago, Hultman said.
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