KANSAS CITY, MISSOURI, U.S. — The response to what may be the most highly anticipated Crop Production and World Agricultural Supply and Demand Estimates (WASDE) reports in years is expected to potentially be explosive following the release of documents by the U.S. Department of Agriculture at midday Monday, Aug. 12. It likely will take traders a couple of days to consider the reports before they get their bearings and adjust to the new outlooks, said Brian Harris, executive director and owner, Global Risk Management Corp., who, with an associate, Patrick Sparks, GRM’s director, client support and market analysis, spoke with Milling & Baking News, a sister publication of World Grain.
Most attention will be trained on whatever changes the USDA may make to its corn and soybean planted acreage estimates in view of the severe planting delays this spring and early summer.
Uncertainty over how much corn farmers were able to sow this spring ignited a rally of more than a dollar a bushel in corn futures from contract lows set in mid-May to contract highs in mid-June. Futures since have trended lower, giving back about half the ground seized during the rally.
Sparks said that during the spring and into the early summer, the trade’s attention was almost exclusively on the prospective supply side of the balance sheet because of the impact of delayed or even prevented plantings, and many may have lost sight of the weak undertone exhibited on the demand side, especially as corn futures surged. He called what occurred during the price runup “demand destruction.” During the past 30 days or so, attention increasingly has been directed to the flagging export and domestic demand for corn, Sparks said.
“We’re way behind some of our competitors from a corn export standpoint,” Sparks asserted. “We continue to see South American values undercut us significantly. Depending on timeframe and location, our landed values often have been 40¢, 50¢ or even 60¢ out of the market. We saw South Korea last week come in and go the route of buying from South America. South Korea obviously is an important customer of ours, and we weren’t even close to securing the business.”
On the domestic side, recent high corn prices and especially escalating cash corn premiums have eroded margins in the ethanol industry.
“Margins are deeply in the red,” Sparks said.
Iowa State University models indicated ethanol plants in Iowa and other Midwestern states operated at an average loss of 22¢ per gallon produced in July with estimated losses of 25¢ a gallon in June. Additionally, ethanol stocks are record high, Sparks pointed out.
“We’re going to see, and have already seen, ethanol plants rendered idle or shut down for significant periods,” he said.
As more attention was shifted to demand destruction and as weather moderated, corn futures began to work their way lower.
“While there are spots with less moisture than we’d like, especially in the East, recent weather has been benign,” Sparks said. “A relatively below-normal temperature base into pollination also has helped the market to sell off a bit.”
Heading into the August USDA reports, analysts’ estimates of corn planted area “are all over the map,” Sparks noted. Some expected the USDA to lower its July estimate of planted area, at 91.7 million acres, by 5 million or more acres because of planting delays and prevented plantings. Most seemed to expect a reduction from the USDA’s July estimate of between 3 million and 4 million acres. Sparks said he expected a reduction of about 3 million acres.
Asked what would constitute a bullish surprise for corn in the August reports, Harris said an acreage estimate reduction of 5 million acres or more from the July estimate may lead to a runup in December corn futures to over $4.50 a bushel. He pointed out that the December future set a contract high in mid-June at just above $4.70 a bushel. Prices since dropped about 75¢ to set a recent low just below $4 on Aug. 1. Corn futures continued to trade at the lowest levels since mid-May.
“Do we have to make new highs? I think the recognition of the demand destruction at this point would say no,” Harris said. “The thing that would change that is if we were to get into a late-season weather issue. To get to $5 a bushel or above, we’re likely to need a weather problem.”
Sparks and Harris said they did not expect the USDA to tweak its yield forecast, currently at 166 bushels per acre, in the August report, even though they, along with most other analysts, believed the forecast was too high and ultimately will be lowered. Trade expectations were for yield to average between 160 and 163 bushels per acre. Uncertainty over yield may help keep corn futures volatile for the next 30 days or so after the August reports are released, Sparks said.
Asked what would constitute a bearish report for corn, Harris said a planted area estimate near 90 million acres and no change to the yield forecast may be construed as bearish for corn. But he didn’t foresee a significant and sustained break in corn futures in the near term even in that event.
“The market will want to maintain a risk premium until we have a known harvested area and yield,” he observed.
Sparks added, “There’s not a lot of meat left on the bone for the bears.” He suggested support will hold during the next 30 to 60 days.
Soybean futures exhibited a pattern similar to that seen in corn heading into the August reports.
“Back in May, when planting delays became pronounced in corn, we saw soybean futures begin to ratchet up,” Harris said. “You essentially rallied about $1.30 a bushel, taking new crop soybean futures from $8.20 in early May to a peak just shy of $9.50 in mid-June.
“Starting in mid-June, the weather began to improve quite a bit, even more so for soybeans than for corn. The soybean crop is made in August, so the plantings situation didn’t seem to be anywhere near as critical as corn.”
As corn plantings were further and further delayed in the spring, expectations were that some of the acres intended for corn would be planted to soybeans instead. But the USDA in its July WASDE lowered its planted area forecast for soybeans by 4.6 million acres, to 80 million.
“The planted area estimate was a clear indication that the farmer didn’t have a lot of faith in a trade deal with China getting done anytime soon,” Sparks said. “Producers proved to be hesitant to put soybeans in the ground even in the face of severely delayed planting on the corn side.”
Harris said most analysts believe the July USDA planted area forecast for soybeans, even with the 4.6-million-acre reduction from June, may be a little too high. He suggested the USDA may trim its planting estimate by between a half-million and 1.5 million acres.
At the same time, a smaller planted area estimate and lower 2019 production forecast might not have as great an impact as one might think “because stocks coming into the year are mammoth.”
The USDA in its July WASDE forecast a record 1.045 billion bushels of soybeans will be carried into 2019-20, which begins Sept. 1. The USDA’s forecast for the 2020 soybean carryover is 795 million bushels, lower than 2019 but still a massive supply by any measure.
“You would have to do significant damage to beans during pod setting, which is happening now, to bring 2020 carryover number back down to reasonable levels of somewhere between 350 million and 400 million bushels,” Harris said.
Harris said a bullish report for soybeans would entail a cut in the soybean planted area estimate by another 3 million acres or so, on top of the 4.6 million-acre-reduction contained in the July WASDE, as a reduction of about 1 million acres is already “baked into prices.”
Prospects for soybeans on the trade front were discouraging, and it now seemed that China was inclined to hold firm in trade talks until the 2020 election, Harris observed.
President Donald Trump’s threat to impose 10% tariffs on the roughly $300 billion worth of Chinese goods yet to be targeted by the administration in the trade war reflected in part the president’s anger with China because it hasn’t significantly increased imports of U.S. agricultural products, including soybeans, as the administration affirmed it said it would.
“But people may be missing the point that China doesn’t need our soybeans right now,” Harris said. “Between African swine fever and what China has imported from Brazil, they don’t need our supply. Their crush margins are deep in the red. They’re not feeding as many pigs, and the only thing they’re going to be short of anytime soon is edible oil.
“Many in the trade are beginning to look at the trade war as a backburner issue. A greater effect may be seen on acreage this coming spring (2020). We’re going to see more corn acres than soybean acres in 2020 anyway, because of what happened this year weather-wise, but the longer the trade war continues, the greater the expected shift to corn from soybean plantings may be.”
Harris commented, “There has been sea change in market structure in the past year. China’s ease in securing Brazilian soybeans this year certainly taught them a lesson as far as reliance on the United States. They are keenly aware that they have another way to go.”
Estimates of pigs lost to African swine fever in China ranged from 20% to 50% of the nation’s herd, and it still was spreading both in China and in neighboring countries. The time it will take to recover from the contagion has been estimated from as little as one year to as many as five years or even longer.
“Our opinion is it will take 1.5 to two years before there is a semblance of normalization,” Harris said.
And once there is a recovery, the world price and trade structure will have changed. Brazil has carved out an even bigger piece of the China pie, and that may not change, he said.