January 18, 2023
USDA’s January report made one very significant statement. USDA lowered corn demand to the lowest levels possible to keep carryover at pipeline requirements.
If we do not see good crops in North or South America, traders will be faced with the largest shortage in many years. The price implications would be long-term and could set the stage for “risk value” as buyers would be taught the issues of supply shortages and the fact that crop production is not guaranteed.
Yet, if we have a good production cycle, the market will face comfortable stocks and the long-term top will be in. Traders will turn complacent about production risk as we have seen in most of the last 10 years.
A good production cycle will reinforce the “we have genetics that will prevent a disaster” mindset, and as a result, the price trend will reflect the lack of concern about the risk of growing a crop. It would most likely be a very bearish environment for the long-term economic farm cycle.
How tight is it?
Here is a perfect example: USDA lowered demand and raised yield in corn. Both strikes of the pen were expected and everyone thought those adjustments would increase stocks. Makes sense.
But USDA reduced harvested acreage by 1.6 million acres and the result was that ending stocks actually fell 15 million bushels. USDA has total demand at the lowest levels since 2015.
Exports have dropped from 2753 mbu in 2020 when we sold to China to a measly 1925 mbu this year. Exports are running behind USDA projections. Typically the U.S. corn export season is February through June, so we hope to see this pick up and meet these expectations.
Feed use has also fallen from the 5903 mbu in 2019 to 5275 this year. Cheaper feedstuffs and reduced herds have contributed to this, but total production of meat is now expected to be in equilibrium or be shy of meeting demand in 2023-24.
Thus, we expect breeding stock retentions to begin showing up. This will be long-term but adds to the argument that lowering demand from here is unlikely.
The end result is that we are looking at demand at levels that would be difficult to lower any further. If there were production problems in South America, demand would be shifted to the U.S.
Currently, private estimates project Argentina to produce around 46.6-49.5 million metric tonnes of corn versus USDA's projection of 52. A 3-4.5 MMT further revision to USDA numbers is about the maximum tolerance before demand would shift.
If it did, both international and domestic users would be competing for the remaining bushels over pipeline requirements, which we believe is 1150 mbu. So, the 1242 mbu end stocks estimate does not leave much room for a demand shift to the U.S.
I hope that explains how bullish this could become.
Now having said that, we want you to look at our preliminary numbers for 2023. With a good production cycle and normal yield, the ag sector could become stocks comfortable, and the downtrend would take control.
We believe that with high input costs, many producers would be caught off guard. We all know markets go down faster than they go up and that non of us know when the top will happen. That is why we strongly suggest building a floor of price protection. Using options is the best way to accomplish that or a combination of cash/futures and options.
Talking to an AgMarket.Net advisor could be worth your time. We also invite you to our annual outlook conference in Nashville where we will discuss all these strategies.
Reach Bill Biedermann at 815-893-7443 or [email protected]
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