February 27, 2023
Last week’s blizzard notwithstanding, spring begins this week on the meteorological calendar. And that means one thing for the grain market: The battle over acres is on.
USDA kicked off the season Feb. 23, releasing updated supply and demand forecasts for 2023 at its annual Agricultural Outlook Forum. While these estimates, as I detailed last week, are based on economic models, not surveys of farmers, they’re the agency’s first set of updated projections since last fall, and the last until the first monthly supply and demand tables come out in May.
Before then, the government releases its survey of Prospective Plantings March 31. Along with South American weather, the acreage debate should suck up most of the oxygen in the market, barring some wild card news from Wall Street, Ukraine or elsewhere around the world.
The outlook report was bearish for new crop corn. USDA said it expects farmers will plant 91 million acres of corn, in line with the average guess from the trade. But weaker demand for both old and new crop corn would swell ending stocks on Aug. 31, 2024 to 1.887 billion bushels, more than 125 million above both expectations and USDA’s first estimates back in November.
The report was mostly neutral for soybeans. USDA forecast 87.5 million acres of soybeans this spring, up a half million from November and 1.1 million less than trade guesses. The government’s ending stocks forecast of 290 million bushels was close to expectations but up 55 million from November.
These numbers are all hypothetical, of course, but they serve as a starting point for traders. Though December 2023 corn futures took a hit from the news, there’s still hope for at least a modest rally this spring. As usual, hope doesn’t guarantee anything.
Spring rallies from March through May in both corn and soybean new crop futures show a statistically significant correlation to USDA’s first May forecasts for supply and demand, as measured by the ratio of projected ending stocks to total usage for the marketing year. The connection is modest, accounting for 25% to 30% of the variance in price movements. Plugging in the Outlook estimates as a placeholder for May generates projections of just where rallies, if they come, could lead.
For corn, USDA’s Outlook stock-to-usage ratio of 13% is just slightly higher than the average over the last 20 years. I measure spring rallies by comparing the high close for March-May to the high from both last fall and the price on the first trading day of the new year. Both measure show potential for rallies of around 7% to 11%, which puts the high close around $6.75.
Trouble is, those rallies represent gains over where prices were trading near the end of last year, when the market was above $6. December 2023 corn hasn’t logged a close above $6 since Jan. 18 and is still trending lower. Monthly bottoms since October have all been lower, a sign that rallies may be harder to come by this spring. So some heavy lifting may be needed to turn the pattern around.
What could trigger a reversal of fortune? In the short run, old crop exports appear to be the only swing factor that could really generate much excitement. USDA currently puts 2022-2023 sales at a disappointing 1.925 billion bushels, a far cry from the 2.47 billion sold during the 2021-2022 marketing year. While both shipments and outstanding sales suggest better potential, Argentine drought appears most likely to provide additional lift.
The Buenos Aires Grain Exchange cut its production estimates again last week. It’s current projection is 236 million bushel below USDA’s last forecast. The U.S. could get a chunk of Argentina’s lost business, especially if Russia doesn’t approve extension of the deal allowing some exports out of Ukraine. Brazil’s big second crop could also be a factor if early dryness persists, though buyers might not get spooked if they believe a 15.1 billion bushel crop is brewing in the U.S., as USDA projects
Under a bullish scenario, higher old crop exports and lower 2023 U.S. production could trim projected carryout enough to lift the projected top third of the selling range to a very friendly $6.50 to $7.30.But there’s reason to believe such gains might be wishful thinking this year.
Historically, the average cash price received by farmers is correlated to the stock-to-usage ratio at the end of the marketing year. Market disruptions caused by the Ukraine war, pandemic, bad crops and record world food price inflation disrupted the traditional math in recent years, inflating prices a dollar or more above where the historical stocks-to-usage ratio projects.
If the market normalizes and USDA’s forecast comes to pass, the projected top third of the selling range for the crop drops to $5.75 to $6.35. December 2023 tested the bottom of that range last week. So, there’s risk the spring rally could fizzle, which happens about one in every four years anyway.
Will soybeans hold?
The same factors cloud spring rally prospects for soybeans. USDA’s Outlook yield of 52 bpa assumes normal growing season weather in key states. It’s actually four-tenths of a bushel lower than the forecast from the statistical trend over the past 20 years, which could add another 35 million bushels to an “average” crop. USDA’s crush estimate also assumes a 13% increase biodiesel demand. If traders fear that increase is premature, ending stocks on Aug. 31, 2024 could swell to 370 million bushels, 60 million above USDA’s Outlook forecast.
Deflation in futures similar to corn could whack the average cash price down to $11, below the cost of production for the average grower. Such a tumble would take the top third of the selling range all the way down to $12.75 to $13.70. November soybeans traded down to the top of that range last week, a hint at what could come under a bearish scenario.
Without deflationary pressure, the outlook for rallies is brighter, even with a biodiesel bust. The top third of the optimistic range is $15.06 to $16.30, well above the high close of $14.1675 from the last trading day of 2022.
The seasonal trend for beans held up better than corn over the winter, but the market was unable to match the New Year’s Eve high. That happens one of every three years, so it’s not a complete outlier. In addition, futures made new closing lows in January, a bearish sign seen in years where prices don’t rally much in spring.
With Brazilian production hitting the market and yields holding up, changing the market’s dynamics this winter won’t be easy. The good news, if that outlook makes you queasy: New crop offers are still profitable, and projected spring prices for crop insurance should offer a decent floor for at least some of your production. And that’s true for corn as well, as you finalize 2023 marketing plans and budgets.
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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