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Ag Marketing IQ: Traders shrug off smaller crop estimates from USDA.

Bryce Knorr, Contributing market analyst

August 14, 2023

4 Min Read
Bear in front of downward market graph
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Drawing conclusions from only one day of trading can be fraught with danger. But the bearish reaction to seemingly bullish corn and soybean production estimates isn’t a good sign for growers hoping prices don’t continue to slide in the wake of the Aug. 11 World Agricultural Supply and Demand Estimates published by USDA.

The agency cut its forecast of 2023 crop yields and production, even more than the trade expected. Yet early rallies faded, leaving December corn and November soybeans with ugly bearish key reversals on daily charts.

Does the market know something about the true size of this year’s crops missed in the surveys of farmers and their fields? Perhaps. But a more likely reason for the market’s disappointing turnaround may have more to do with demand, rather than supply. Estimates of production may get bigger or smaller by the time USDA puts out its final monthly estimates in January. Proving demand may take longer, in a world where traders and markets have little patience to wait for news, particularly good news.

The trouble isn’t with USDA’s production estimates. Sure, these may change in the months ahead. But USDA August yield estimates – 175.1 bushels per acre for corn and 50.9 bpa for soybeans – aren’t that much different from forecasts produced by a handful of models I use, based on crop ratings, weather and Vegetation Health Indexes. These historically show a probability of more than 95%, meaning final results aren’t likely to be that much different. Some are a little higher, some are lower. But the most accurate method of forecasting final yields – combining various factors in a multiple regression analysis – puts corn within a bushel of USDA’s August print, with soybeans even closer.

Related:USDA reports smaller 2023 corn, soybean production

Demand potential

USDA’s track record in August shows only a slight tendency to understate yields for both crops. But having more bushels to sell isn’t necessarily a negative – it also increases potential for demand to go up too. Smaller crops likely are one reason why the government cut its forecast for usage of corn and soybeans in the year ahead.

Once the market gets comfortable with supply, which may happen sooner, rather than later, demand could be the lynchpin for rallies. And that’s where the market appears skeptical. A year ago the market fretted over supplies as inflation surged and impacts from the Ukraine war and supply chain snafus dominated the headlines. Ukraine’s ability to export is still uncertain. But drivers of demand growth appear missing in action as inflation fears begin to fade a little.

In the corn trade, ethanol is no longer a growth engine and the latest forecasts from the U.S energy department are even more bearish than USDA’s August assessment. Usage to feed livestock is also faltering and could come in less than USDA forecasts as well. Without a shock to global production, say in South America, importers may not need to push bids either.

USDA raised its average cash price for 2023 corn by 10 cents to $4.90. But with futures closing last week at $4.8725, that seems overly optimistic. My own model is lower, suggesting $4 futures could be a risk if a bearish mood prevails into harvest.

Soybeans could also be hard-pressed to find demand. USDA appears too high already on its forecast for crush and exports. Lack of a significant biofuel mandate could leave processors with too much capacity. Relentless expansion in Brazil could also continue to cut into U.S. export business, and China is no longer the default buyer for the industry. If the economy there continues to struggle, China may import even fewer beans than USDA already sees. November futures struggled to hold $13 last week and harvest hedge pressure could threaten the $12 barrier eventually.

Seasonal trends are not encouraging, either. Soybeans could find some footing soon, because yields are made in the weeks ahead. But more than 60% of the time November slides into October when the combines run.

And, after failing to take out June highs in July, December corn also appears headed on a similarly lower trajectory. That’s the trend 70% of the time over the past 50 years.

Rallies can always happen, of course, no matter the August outlook. But make plans now if they don’t.

Knorr writes from Chicago, Ill. Email him at [email protected].

The opinions of the author are not necessarily those of Farm Futures or Farm Progress.       

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About the Author(s)

Bryce Knorr

Contributing market analyst, Farm Futures

Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and Commodity Trading Advisor. A journalist with more than 45 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.

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