November 6, 2023
With harvest beginning to wind down – hopefully – the scales of the market will begin to tilt away from the size of U.S. crops to how much will be used in coming months.
To be sure, this week’s Nov. 9 World Agricultural Supply and Demand Estimates will include updated production numbers. History, as I discussed last week, suggests at least some possibility the WASDE could confirm adage that “small crops get smaller.” But changes, if they come, may not be enough to rev up the bulls, especially for a corn outlook hampered by a large projected inventory hangover.
Indeed, nearby corn posted its lowest close in almost three years last week. Soybeans fared better, with November futures holding above $13 into delivery and getting a decent bounce in to the end of the week. Talk about dry conditions in parts of Brazil and hopes for product sales helped support prices, boosted by forecasts for two more weeks of below average rainfall in the key central growing region.
Those soybeans won’t hit the market for months, just one reason why end users must fish or cut bait. As harvest in the U.S. hits the home stretch, it’s buying season for corn and soybeans – unless exporters, processors and livestock feeders feel emboldened enough to secure only what they need on a hand-to-mouth basis.
So here’s how demand shapes up for the rest of the 2023-2024 marketing year.
Soybean exports gain
Exports typically rule U.S. soybean demand, accounting for as much as 50% of total usage. For the last two decades, China’s appetite for imports and Brazil’s relentless production boom, along with U.S. supplies, determined much of the variance in U.S. sales abroad. These factors are again in play this year, providing keys to watch in the upcoming WASDE.
USDA’s last forecast put total U.S. exports at 1.775 billion bushels, down 12% from 2022-2023 and the lowest since the short crop of 2019.
The agency also saw China’s total soybean imports stalling, dropping by nearly 75 million bushels due to economic troubles and losses in the key hog sector. Though there are signs China’s various woes have bottomed, data to date isn’t encouraging. Total U.S. sales and shipments to China through the final days of October were off 35%, while the latest official numbers from China showed its total imports off 24% in September.
The U.S. accounted for just 2% of those purchases, with Brazil grabbing a 96% share. While the U.S. piece of the early pie is a little smaller than average, Brazil’s portion grew thanks to the extreme drought that slashed Argentine production to the lowest level in 25 years.
Argentine yields are expected to recover this year and acreage could expand more than initial forecasts as weather forced some farmers to abandon early corn seeding. Argentina also should benefit from El Nino rains, but its soybeans won’t hit the market until U.S. farmers are already in the field next spring.
Brazil’s poor start
A dry early growing season in Brazil’s key growing region could force USDA to revise its estimate of production there. Vegetative Health Index (VHI) readings for the country are down from good early readings two months ago, suggesting the crop there isn’t off to a great start.
Still, total 2023 crop commitments from all buyers are off 28% from last year. The pace is improving, but that’s the seasonal trend once harvest fills the pipeline, though low water levels on the Mississippi River are restricting shipments out of the Gulf.
Projecting the current weekly trend – if it holds -- yields a total for the marketing year that’s a little more optimistic than USDA. But without a significant drop in Brazilian production or better than expected rebound in Chinese demand, U.S. sales could struggle.
There are a few hopeful green shoots. A Chinese trade delegation inked its first ceremonial deal in Iowa since 2017, and U.S. growers visited Beijing to talk up new business as the two countries moved cautiously to improve relations diplomatically. But it’s still far too soon to tell if those steps will pay dividends.
Crush, the other leg of soybean demand, is benefiting from the poor crop in Argentina, which forced its large processing industry to import stocks from its neighbors. U.S. crush margins are favorable and processors used 4.3% more in September than last year, in line with USDA’s current forecast for the entire marketing year.
U.S. crush capacity is expanding in hopes of a biofuel boom, but that growth is still uncertain as high interest rates and inflation take their toll on economic growth. Still, the stock market is booming right now as investors bet the Federal Reserve is done raising interest rates, and animal spirits on Wall Street may be spilling over to soybean speculators looking to place new bullish bets.
My pricing model for futures shows there’s still upside potential, as long as USDA, foreign policy debates, or Mother Nature doesn’t rain on the parade.
Tracking demand for feed grains is usually trickier than soybeans because around 40% of usage walks off the farm from livestock consumption. There’s no way to survey that demand directly, though the projection of “Grain Consuming Animal Unites” – critters’ appetite – can change from month to month. Otherwise, the government imputes feed consumption from quarterly Grain Stocks, using “disappearances” unexplained by consumption from processors and exports, data that’s reported weekly and monthly.
The next stocks report doesn’t come out until Jan. 12, so USDA is unlikely to make major changes to feed usage Nov. 9 unless its production estimate changes fairly dramatically. Barring that, the facts so far for exports and ethanol paint a mixed picture.
Midwest ethanol plant margins are better than year ago levels but seasonally begin to taper off soon. Weekly production is also up from last year but already tailing off, and if drivers cut back as expected, output could be lower for the 2023 marketing year. USDA currently forecasts a 2.4% increase year-on-year, but projections from the U.S. Energy Information Administration are off more than 1%.
Exports, meanwhile, are much improved from last year’s disappointing movement, which produced the lowest annual total since the 2012 drought short crop. Total sales and shipments in the first two months of the new marketing year are up 26%, and are also above the long-term average so far. Yet the U.S. supply of exportable feed grain compared to other major exporters is only 5% higher than last year, so improvement could be limited without a big increase in global feed consumption or trouble in South America.
The U.S. Ag Attache in Argentina recently knocked around 80 million bushels off its estimates for production and exports compared to USDA’s official October WASDE due to early dryness that affected acreage and yields. The VHI is 12% below average and suggests even bigger cuts to yields could be coming eventually.
It’s still far too early for meaningful data out of Brazil because so much of its production comes from its big second crop, which won’t hit the market until the U.S. summer. By then the U.S. selling season is usually over unless a dry start to the growing season spooks end users.
Futures for 2023 crop corn delivery in 2024 have kept to my projected selling targeted range of $4.97 to $5.44 since the marketing year began Sept. 1. Breaking out of their trading range likely will take some major news that isn’t in the market yet. Whether USDA provides such a spark Nov. 9 is far from certain.
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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