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Fewer cattle may weaken feed demand

Watch for corn’s balance sheet to expand on next week’s USDA report.

Brian Splitt

January 4, 2023

6 Min Read
Cattle eating in a feed lot
Getty/iStockphoto

Editor’s note: Brian Splitt will share his grain marketing expertise, “How to market with technicals and fundamentals,” at the upcoming Farm Futures Business Summit Jan. 19-20, 2023. Review and register here.

Agricultural futures finished 2022 on a strong note with fund managers long corn, soybeans and soybean meal – likely window dressing their positions into year-end to pad their profits and, by extension, their bonuses.

Once the calendar flipped, it appears as though the first agenda item was to begin booking those profits and exit their length.  

History would suggest that if USDA raises yields in November, they are likely to do it again in the upcoming January report. While yield changes are difficult to forecast, some of the pre-report estimates suggest a 75 million bushel increase in production is likely.

U.S. season-to-date corn exports are down 27% versus last year and 18% below USDA’s goal. This trend could support USDA dropping U.S. corn exports roughly 100 mb. Brazil’s corn exports reached a record 43.1 million metric tonnes in 2022, up 109.5% from 2021.

With a Quarterly Stocks report as part of the data drop coming next week, there is a very real risk of USDA finding bushels that get plopped right onto the balance sheet. There is an awful lot of bullish rhetoric in the cattle market, for example, due to low cattle numbers in the country. This should cause concern regarding the Feed/Residual portion of the balance sheet for corn.

It is entirely plausible that corn’s balance sheet will expand next week on both the supply and the demand ledgers. With that being said, USDA will have to increase carryout for corn by 303 mb to match the 1.540 billion bushel estimate from the January 2022 report.

Either way, if the data dump is bearish enough for March futures to break through the $6.35 low made in December, there will be plenty of talk about the remaining gap at $5.91 yet to be filled.

It is important to note that the rally into the end of the year brought corn to a confluence of several resistance levels that proved to be a major turning point. Contract highs for old crop corn were made in May of 2023, and last week’s high failed at the down trend line from May. Last week’s high also failed at the 62% retracement level of the break from the October high to the early December low. While making the October high, March corn futures bounced repeatedly off levels in the low $6.80s; these lows provided a ceiling at last week’s high.

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Soybeans reach objective

Soybean futures also reached a major objective on last week’s rally. March, May and July futures filled gaps left in June when soybean futures gapped lower coming out of Father’s Day weekend.

Since then, another round of precipitation has landed in Argentina and parts of Brazil. Brazil’s 2022 soybean exports were down 10.1% from their record export program in 2021 of 86.6 MMT, as last year’s drought reduced exportable supply. The reduction in Brazilian soybean exports has kept China coming to the U.S., but for how long?

We expect Brazil to reach a new soybean export record in 2023 with their current crop reaching new record production levels above 150 MMT.

With the bulk of harvest beginning this month and shipments out of Brazil expected to build momentum in February, one must consider the negative impact a strong Brazilian export program on both domestic basis and futures. Cash markets in areas with beefed-up crush capacity will likely hold better than elsewhere, but overall, the bias would be for values to weaken as Brazil’s crop is made available to world buyers.

The same assumption would hold true for soybeans as it relates to increased production in November translating to increased production in January. Pre-report estimates suggest a 20 mb increase to production is likely. U.S. season-to-date soybean exports are down 7% vs last year which some believe could support USDA dropping U.S. soybean exports 50 mb.

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Potential weakness?

While soybeans are still respecting their uptrend from lows scored in October, it is important to identify where weakness could accelerate. The uptrend on March Soybeans comes in near $14.70, while a shelf of support was established in mid-December in the low $14.60s. A breach of this support could lead soybean futures all the way back down to the low end of their multi-month trading range which is about $1 low; there is a gap yet to be filled below the market at $13.5825.

Next week’s report will likely set the tone for the first quarter of 2023. The average price for December 2023 Corn and November 2023 Soybeans during the month of February will dictate crop insurance revenue levels and AgMarket.Net has been actively protecting 2023 production as the crop will be one of, if not the most expensive crops to plant.

Feel free to contact me directly at 815-665-0463 or anyone on the AgMarket.Net team at 844-4AGMRKT for assistance. We are here to help.

The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. AgMarket.Net is the Farm Division of John Stewart and Associates (JSA) based out of St Joe, MO and all futures and options trades are cleared through ADMIS in Chicago IL. This material has been prepared by an agent of JSA or a third party and is, or is in the nature of, a solicitation. By accepting this communication, you agree that you are an experienced user of the futures markets, capable of making independent trading decisions, and agree that you are not, and will not, rely solely on this communication in making trading decisions. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading information and advice is based on information taken from 3rd party sources that are believed to be reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. The services provided by JSA may not be available in all jurisdictions. It is possible that the country in which you are a resident prohibits us from opening and maintaining an account for you.

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

About the Author(s)

Brian Splitt

Technical analyst, AgMarket.Net

Brian began his career in the financial services industry with expertise in insurance products, stocks, bonds, mutual funds and annuities. Brian studied technical analysis and migrated to commodities where he has built a successful career. As a technical analyst with AgMarket.Net, he utilizes prior price or volume action or trends to predict future price moves and break down agricultural balance sheets. Brian is a decorated combat veteran of Operation Iraqi Freedom as well as a member of a Gold Star Family.

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