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Stocks report hints at demand drop

Getty/iStockphoto corn unloading into pile
Despite the post-report rally, USDA's numbers show corn usage declined in the last quarter of the 2021-22 marketing year.

Today’s Quarterly Stocks Report was par for the course in the fact that USDA had yet another 100+ million bushel miss on old crop corn carry-in. Just weeks ago, the September WASDE report estimated old crop corn carry-in at 1.525 billion bushels which was their last “guesstimate” of today’s number.

Today’s USDA estimate of U.S. September 1 stocks was lower than expected at 1.377 bb, a full 148 mb less than the September WASDE report. USDA reduced last year’s yield by 0.3 bushels per acre, which accounted for a 40 mb reduction in 2021 production.

As we look ahead to the October WASDE report, USDA will rectify the new crop balance sheet with today’s stocks number. This means that the new crop carry-out estimate of 1.219 bb from the September WASDE report will be reduced by 148 mb to 1.071 bb before the USDA makes further adjustments to production and demand estimates. That 1.071 bb number would be wildly bullish, but likely won’t come to fruition. While today’s report has absolutely nothing to do with the new crop balance sheet aside from old crop carry-in, we can glean some information regarding demand if we look hard enough.

Brace for demand drop

Thinking back to the June Quarterly Stocks Report, U.S. corn supply was up 6% year-over-year. Today’s 1.377 bb estimate is 11.5% higher year-over-year. So even though today’s stocks data was less than what the trade expected, it does suggest that usage in the fourth quarter of the marketing year was impacted significantly. Even though last year’s production was reduced by 40 mb, the reduction in stocks from June 1 to Sept. 1 of 2022 was less than in 2021. Demand is becoming a problem and the USDA will likely reduce new crop demand on the October WASDE report, possibly in all three categories: exports, ethanol, and feed/residual.

We know corn exports are well behind last year’s pace and ethanol production this week was the lowest in at least five years. I don’t know what USDA will do with their yield estimate next month, but if USDA stays steady on yield and reduces demand, we could very well see USDA’s estimate of new crop carryout go up in October. A demand reduction of 148 mb in October would keep carryout steady month to month. A 148 mb reduction in total demand coupled with an increase in yield would actually raise USDA's estimate of new crop corn carryout.

One doesn’t have to try hard to paint a bearish picture for soybeans. The September WASDE report estimated old crop soybean carry-in at 240 mb while today’s number was 274 mb, or an increase of 14.2%. Every phone call I received this week where soybean yield was a topic leads me to believe USDA will increase soybean yield in October. Argentinean producers just dumped soybeans on the market which will likely satisfy enough Chinese demand to put into question the necessity for China to buy U.S. soybeans over the next couple months. Without a weather issue for Brazil, we will be looking at a scenario where China may be absent from the U.S. export market for months to come.

Currency collapse

Then we have the other “stocks” that will have an impact on grains – equities. Thinking back on the week, the British Pound collapsed coming out of the weekend, to the point where the CME Group halted trade of the product. Then the Bank of England came in and bought GILTS to prevent a collapse of British pension funds that are highly leveraged and rapidly losing collateral.

I don’t believe British pension funds are the only ones sensitive to what is happening with interest rates, and the same scenario is likely playing out domestically. The DOW, S&P, and Nasdaq all finished the quarter below the major lows scored in June which is a horrible finish to the quarter. Let’s not pretend that further liquidation in the stock market will have no bearing on money flows in other markets.

We are in a global recession and fund managers don’t care if the American agricultural producer makes money on their crop. A friend in the industry once said to me, “Farmers think they need us at $3.50 corn, and they really don’t, but they don’t think they need us at $6.50 corn, and they really do. Which level has more downside risk?”

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

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