November 13, 2023
So much for small crops getting smaller.
While the trend of lower yields from this year’s September and October World Agricultural Supply And Demand Estimates suggested a chance USDA would again cut its corn and soybean production estimates Nov. 9, the agency instead increased output of both crops last week. That was in line with average changes projected from October to November alone.
While the outcome generally followed trade guesses, futures reacted poorly. Nearby corn fell to its lowest level of the 2023-2024 marketing year, and soybeans tumbled more than 20 cents.
To be sure, some of the bearish reaction likely spilled over from selling in financial markets obsessed with interest rates, compounded by typical risk aversion ahead of the Veteran’s Day holiday. Even though exchanges kept right on trading Friday, the federal government closed, and weekends, long or not, are a minefield for participants fearing the Israel-Hamas war could erupt into a larger Middle East conflict.
But with new supply data largely on hold until January, growers hoping for grain rallies must rely on demand news to sway the day.
Though there was some good news on that front, at least for soybeans, farmers debating sales should take a long look at their local markets for clues on how and when to market crops. A challenging year ahead for prices means there’s no one-size-fits-all solution.
Baseline sours mood
In addition to WASDE, USDA released another set of projections last week, its first take on supply and demand for the 2024-2025 marketing year. The agency’s so-called “baseline” is part of the federal government’s budgeting process. Based on data from October, it’s already a little out-of-date. But the estimates support what my models indicate: Larger stocks of corn and soybeans mean lower prices, another factor weighing on markets into Veteran’s Day.
USDA’s overall narrative runs contrary to the expectations of some traders, who bought into notions that record temperatures from the new El Nino warming of the tropical Pacific would trigger another commodity boom. But the only certainty right now seems to be uncertainty – and just like corn, there’s a surplus of that for sure.
Deciding whether to store or sell gains urgency in November, as free storage terms at elevators expire, forcing farmers without adequate space on farm to pay for the opportunity to keep playing. And, thanks to high interest rates, the cost of holding grain rather than selling it to use proceeds to pay down loans or invest is problematic, at the least. Average Midwest basis for both crops is less than the cost of interest alone, a clue that a significant cash market reversal may be needed to make physical storage – in town or on farm – pay off.
While 2023 U.S. corn yields are expected to be below normal for a fifth consecutive harvest – something that hasn’t happened since the 1970s – expanding acreage translates into a huge 15.234 billion bushel crop for 2023, the second biggest ever if it stands. This would swell supplies left over at the end of the marketing year Aug. 31 to the highest level since 2016.
The trend in soybean yields nationally is more up and down than corn. USDA boosted its production estimate of the crop by 25 million bushels, though still calling for carryout of the oilseed to fall to the lowest level since 2015.
As usual, averages can be misleading. The difference between cash and futures is weaker than normal some areas and stronger than others, depending in part on how tight storage space is.
Excess inventories are particularly a problem in the eastern Midwest, where larger than normal grain stocks appear to be helping to depress basis in Ohio and Indiana. Lower stocks exist in Illinois, Kansas and Nebraska, where basis is stronger than average. Less space in Iowa this fall means weaker basis there, but not in Minnesota. The situation is mixed in Missouri, where inventories are also taking up a greater percentage of available bins – corn bids are weaker than average and soybeans a little stronger.
Basis is only one factor in storage decision-making process. Most growers store for flat price gains alone. Prospects there likely depend in part on whether USDA’s assumptions about demand play out.
In general, most forecasting models follow a version of “The Field of Dreams:” Bigger crops mean bigger usage. The grow-more-sell-more formula was one reason why the soybean market sold off Nov. 9, when both USDA and Brazil’s ag agency released updates. Brazil’s CONAB raised its forecast of soybean production and exports there despite on-going weather concerns, helping put futures back on their heels.
USDA, meanwhile, made no changes to its South American production forecasts and left U.S. exports unchanged, so the 25 million bushels of extra production flowed to its bottom line of carryout, raising ending stocks a like amount.
But with soybeans, economics tell only part of the story. With the U.S. and China trying to improve strained relations, including talk of a summit, state-controlled Chinese grain companies followed through on the first deals from trade delegations since 2017 by making big purchases USDA announced under its daily and weekly export reports.
While China’s total so far is modest, the overall pace of total sales and shipments to all customers suggests USDA could be too low on its estimate for the entire marketing year.
The other major category of demand – crush – is also subject to the whims of Washington. USDA continues to see increasing biofuel demand boosting crush, something that hasn’t shown up in monthly data so far. The next news on that front comes Nov. 15, when the National Oilseed Processors Association reports how much its members used in October, a good precursor to USDA estimates due Dec. 1.
Corn absorbs supply
The news on corn demand followed the “bigger is better” scenario. USDA increased its production forecast by 170 million bushels, but only 50 million bushels of that wound up on the increase in projected ending stocks. The agency raised its forecast of usage by livestock feeders, ethanol plants and exporters to keep its carrying bottom line increase modest.
Feeding more corn could be dicey. USDA sees lower red meat and poultry production though egg and milk output is expected to grow.
USDA also continues to paint an optimist picture for ethanol, despite U.S. Energy Information Administration calls for lower production and blending. Exports seem in line with the agency’s expectations, though weekly sales data is weaker than world forecasts suggest because so much is unknown about South American corn, most of which won’t be planted for weeks if not months.
This raises fears U.S. ending stocks come Aug. 31 will be even larger than USDA expects, compounded by what could be another big increase if the baseline projections for next year are close. USDA’s early assumptions about 2024 acreage show a 4% shift between the crops, with more soybeans and less corn. The ratio of 2024 crop soybean to corn futures does indeed favor soybeans, though USDA sees corn continuing to beat beans when the yardstick is returns per acre over variable costs.
Bottom line math could also factor into your 2023 crop “store or sell” decision. Farmers who can book a profit on old crop now may be able to take more risk on 2024 plans than those whose corn or soybeans are in the red.
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