It’s still a weather market
If you look the seasonal price charts for corn and soybeans, the month of July is typically a month where prices begin the retreat from the seasonal highs in May and June as weather premiums are slowly eased out of the markets. One could argue that seasonal retreat is happening again this year, but the price movements are neither slow nor easy. New crop corn futures hit their peak in early May. New crop soybeans followed in early June. But both markets have swung wildly since then. Traders have taken out and put back in weather premiums a few times over the past couple of months, mainly based on whether the two-week forecast had above or below average chances of precipitation for the Corn Belt. Given the drought conditions in the northern and western Corn Belt and the expansion of crop plantings in the same area, traders are trying to figure out if the crop bushels being lost in the west will be offset by a great crop in the east, where rains have been more plentiful and timely.
USDA’s reports over the summer have reflected this balancing act with the crops, as the USDA data has given both bears and bulls something to think about. The June acreage report showed increased area for corn, but no change for soybeans. Traders were expecting increases for both, with a larger boost for corn. The relative lack of plantings sent futures prices soaring, at least until the weather forecast changed. The drought of 2020 and now 2021 has been a consistent threat for crop production. And while the drought has had some impact for producers in Iowa and westward, the national crop production outlook has remained robust. USDA’s weekly Crop Progress reports have shown the national ratings for both corn and soybeans to be holding just below the 5-year average throughout most of the growing season. Historically, when national crop ratings are near the 5-year average, national crop yields are near trend. Based on USDA’s trend yields, the corn crop would be above 15 billion bushels and the soybean crop would be 4.4 billion. So the markets would have ample supplies to work with over the coming marketing year.
The latest uptick in crop prices came with another USDA report, as the July World Ag Supply and Demand Estimates (known as the WASDE) report provided a hint that the drought impacts may not be fully incorporated yet. While the corn and soybean production projections were not changed due to the drought, the wheat production numbers took a significant hit. That boosted wheat prices directly and gave room for corn and soybean prices to increase as well. The drought impact on wheat also served as a reminder to traders that the corn and soybean crops are approaching critical phases in their growth, silking for corn and pod set for soybeans.
Throughout these swings in production expectations and prices, traders have also been monitoring the usage sides of the corn and soybean markets. Given that prices are significantly higher than a year ago, there is expected there will some pullback on usage. The USDA projections preview this, but it is interesting that the overall drop in expected usage is quite small and the decline is not even across users. For corn, USDA projects export sales to decline, feed usage to hold steady, and corn grind for ethanol to increase. The individual shifts make sense in isolation: exports are the most sensitive to price swings, feed is being driven by the drought, and ethanol is still rebounding from the COVID slowdown. For soybeans, USDA projects export sales to decline and domestic crush to increase. Again, in isolation, these shifts make sense as the crush usage is mainly driven by feed needs. The surprising aspect is the relative strength of exports, even with the projected decline, as the current estimates show the 2021 marketing year as the 2nd best corn export year and the 4th best soybean export year, despite the higher prices.
While futures prices have see-sawed back and forth for the past couple of months, USDA’s price projections have moved only slightly. Currently, USDA projects 2021/22 season-average prices of $5.60 per bushel for corn and $13.70 per bushel for soybeans. Meanwhile, futures-based estimates for the season-average prices have ranged between $4.90-5.90 for corn and $12-14 for soybeans. Despite these dramatic price swings, the markets have consistently offered profitable pricing points throughout the entire summer. Even on the limit down days, prices are well above production costs. There’s an old saying, “It’s hard to lose money when you’re making a profit”. After the past few years of lower prices, it’s good to have some strong pricing opportunities now.
Chad Hart is a professor of economics and crop markets specialist at Iowa State University and ISU Extension and Outreach economist.
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