September 14, 2022
Prior to January of 2020, USDA reports were often met by analysts complaining about how the agency seemed to smooth over data with revisions that took years to make. In 2019, the over-estimated crop was so dramatic that procurement officers literally lost their jobs when corporate heads looking at the large USDA supply numbers insisted buyers get inputs bought at normal or discounted values. But the reality of regional shortages caused buyers to pay historical premiums and disappoint corporate returns.
Today’s USDA is different. It’s now viewed as a reliable source of information for end users and producers.
This week’s September WASDE report recognized:
Farmers reduced acres due to poor spring conditions and opted to move some land into Prevent Plant
Crop conditions are not great; current corn crop conditions are below 2019 levels and near 2019 levels for beans, accurately reflecting crops that have experienced yield loss
Demand needs to be reduced if supplies do not increase
USDA reports are once again becoming a usable tool for buyers and sellers to budget and manage the risk of finding equilibrium.
This week USDA pegged corn production at 13.944 billion bushels versus usage at 14.275. That is a shortage of 331 million bushels. Since we will end up with 1.525 billion bushel carryover from the old crop, we can use some of that supply and only cut our demand by 250 million bushels, which keeps U.S. ending stocks at a positive 1.219 billion bushels.
This supply is extremely tight and only reflects a 31-day supply versus a 37-day supply of old crop when futures topped at $8.27 during a delivery month.
When we compare previous quarterly stocks reports that track actual grain in the bin, and what cash markets are paying, we can identify it takes 1.200 billion bushels to keep pipeline (trains, trucks, bin sweeps) requirements satisfied. Thus supplies are so tight, there is no room for further loss. Yet, historically, when USDA cuts yield on this report, there is a 70% chance we will see a further cut.
Based on current weather and yield reports coming in, it looks like that is a reasonable assumption to see further supply reduction. At this point, that would require a 1:1 cut in demand.
Impacts of lower demand
Cutting demand is not a good thing for any industry. Usually, it takes either a price that is so high it causes unprofitability, or it forces end users to shut down (or both). Some shut down for a season while others, like a few livestock producers, might retire.
The last time we saw a dramatic forced demand reduction, it took over three years to win that demand back, and prices tanked in the meantime.
If we as an industry see demand pulling back, that is a farmer’s signal that you better sell --a lot. This will not be easy to see because we all think the market has to go to $XX.00 corn in order to cut demand. But that is not necessarily true. Demand can decline because actual cash markets in the west are as much as 2.00+ per bushel over futures, which means some livestock yards are paying as much as $9 per bu. for corn.
Additionally, Fed policy is intended to cut prices by making it harder for the consumer to spend money as if it was growing on a tree. That means people will buy fewer TVs, furniture, shoes, and even travel. But the impact on food prices is more difficult to “influence” with fed policy.
Yet, Fed policy does affect the way funds will approach the speculative side of commodities. If the inflation hedge is “off,” the 1.75 billion bushels of corn the funds owned last year may not only disappear, but funds could go short -- and that selling would take some wind out of the sail.
From an international standpoint, the Fed policy keeps the dollar strong. Although we may have seen the high, the dollar should remain range bound at historically high levels. And this means export demand may be looking for other suppliers and/or substitutable supplies.
Is South America the answer?
To eliminate the tight stocks situation that the world and the U.S. is in, it will eventually require a good production cycle. Right now, everyone is predicting a huge South American supply that will hit the market by spring. That will help push buyers to only get nearby needs filled and wait for the bigger crop to buy out ahead.
To be fair, that is a big bet and if the southern hemisphere is not kicking it, the world will go absolutely impulsive. To give you a word picture, when the warnings of a hurricane are coming, consumers remain logical and passive. But when the hurricane is confirmed, fear becomes real and the urgency that “it is about to hit,” what do we see consumers and social behaviors do? That is a great picture to describe how tight corn and bean stocks are and how important it is that record crops come out of South America.
Odds usually favor that the hurricane will dissipate or change direction and a catastrophe is averted. But if South American crops disappoint, then the hurricane is going to hit, and we will experience something that will leave aftermath few thought possible because it has not happened since 1961.
Useful USDA info
Your father’s USDA has changed and is now providing us with information we can use. They are telling it like it is, and letting the buyers and the sellers decide how to find equilibrium.
This is now useful and relevant. This report tells us that we have some critical factors to weigh in coming months. More than ever, we are walking on a very thin rope. This tells us that we need to have enough profits locked in and floors established so we put our operations in strong financial health, but to use bins on the rest, and watch demand as well as South American weather.
Then let’s see what the next production and Quarterly stocks reports suggest.
Reach Bill Biedermann at 815-893-7443 or [email protected].
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About the Author(s)
Hedging strategist, AgMarket.Net
Bill is a well-known speaker, presenter and commodities advisor. In addition to trading commodities for 40 years he has testified before Congressional hearings, CFTC hearings, served for the U.S. State Department AID and co-founded one of the largest IB Brokerage and Agricultural Economic Research firms in the U.S. Bill graduated from Illinois State University with majors in Agricultural Production, Ag Economics and Ag Education and farmed from 1973-1988.
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