May 13, 2022
USDA officials last month deflected many pressing questions by advising analysts to “stay tuned for the May WASDE.” Boy, were they right.
Besides providing the most detailed explanation yet about impacts of the war in Ukraine, the agency shocked the trade, myself included, by slashing its estimate of U.S. corn yields by four bushels per acre. The first monthly new crop balance sheets also were tight across the board, with record or near-record prices predicted for 2022 corn, soybeans and wheat.
While the World Agricultural Supply And Demand Estimates featured plenty of news, the real surprise was the corn yield. The May, June and July WASDE’s estimate corn and soybean yields is based on a statistical formula taking into account summer weather, and for corn, May 15 planting progress in key Midwest states. Normally USDA doesn’t adjust the corn yield until June at the earliest before real farmers are surveyed in August. And many years, four bushels wouldn’t be much. But global food inflation means every bushel counts this year, so government economists took the plunge and cut the estimate even before seeing the actual May 15 Crop Progress figure published Monday. Spoiler alert: The 177 bpa appears to assume seeding around only 52% in eight states weighted by their harvested acreage. The average is around 73%.
The move cut more than 325 million bushels off projected production. In normal times that might not be significant. But weather and war changed that equation. Drought affected South America this winter and spring, while exports out of the Former Soviet Union were projected down by nearly half.
Some of Russia’s modest corn crop may wind up in China, which USDA says is ramping up corn imports again. Maybe, but the U.S. isn’t getting much of the business. U.S. 2021 crop corn commitments to China are down 36% year to date though they do account for 26% of total sales and shipments so far.
Overall, USDA’s first estimates for corn supply and demand are mostly in line with what my models are suggesting, projecting leftover supplies at the end of the marketing year Aug. 31, 2023 will be 1.36 billion bushels, the lowest number of days’ supply since the 2013 crop year. The average cash price received by farmers of $6.75 would be second only to the record $6.89 set the year after the 2012 drought.
Demand rationing caused by increased prices would be modest, 370 million bushels, with exports and feed usage absorbing the hit. Livestock producers should tighten their belts and use less, especially with beef production falling and higher meat prices hurting beleaguered consumers. Expensive grain prices around the world would cut exports a modest 4%.
While bullish, the market already has already factored in a lot. Tight stocks boost rally potential, and this year’s projection suggests average gains of 25% off spring lows. That equates to a closing price high of $7.59. December 2022 corn closed at $7.53 on report day and touched $7.585 intraday Friday.
My own model puts potential to $7.95, but weather will ultimately decide if that objective – or even higher – is hit.
The meteorological news out May 12 was lost in the WASDE shuffle, but could be significant too. U.S. forecasters said La Nina cooling of the equatorial Pacific could last through the end of 2022. Summer La Nina conditions in the U.S. are associated with lower corn yields. Normally that boosts summer and fall rally potential. The projection this year is a top at $7.97, aligning with my supply and demand model.
Soybeans must wait
Planting progress isn’t a factor in USDA’s yield equation for soybeans, so the statistical estimate was kept at 51.5 bpa. If farmers can plant all the 91 million acres reported as March 31 intentions, total production would be a record 4.64 billion bushels. Still, lower production this year in South America is boosting demand, tightening U.S. old crop stocks. USDA forecasts a sharp rebound in demand from China in the coming year which would keep the number of day’s supply relatively snug even if Brazil and Argentina get back on track, boosting the average cash price received by farmers to a record $14.40.
My model tracks USDA’s prediction mostly, and puts the top third of the new crop selling range at $16.62 to $17.90. The tight supply forecast not surprisingly boosts rally potential, projecting a 25% rally off the February average futures price of $14.33 – or $17.88.
The La Nina model is even more bullish, seeing an average rally off spring lows of 35% -- which would take futures all the way to $18.98.
The high November 2022 close is $15.3725, with the intraday high at $15.55. So, prices could still have some room to run, though a final push may wait until later in the summer when U.S. acreage is known, soybean yields are made and South American weather is starting to come into focus. As USDA said for May, “stay tuned.”
In the near-term, wheat could be a trigger for corn and soybeans. USDA’s first survey of winter wheat production and its all-wheat total aligned with crop ratings and the Vegetative Health Index, with the average cash price received by farmers a record $10.75 a bushel. My models say that should could take all three futures markets near $13 – or beyond – and it did.
Chicago July already has a close at $12.525 and an intraday high at $12.7825. The hard red winter wheat closed at $12.82 Friday, with an intraday high a dime higher. Minneapolis September ended at $13.1875 on Friday, topping at $13.30 intraday.
The bottom line for corn and soybean growers is simple. The market could go higher – a lot higher, if western drought spreads. Still, prices are strong and mid-May is often a good time to make some new crop sales historically. Don’t let the spring rush interfere with making decisions that are crucial for your business. The world may be turned upside down now. But eventually even the biggest messes get sorted out.
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