June 23, 2020
Doing nothing is hard work. Those of us who stayed at home over the past couple of months found out just how hard.
Doing nothing isn’t easy for markets, either. That’s just one reason grain prices could be headed for a turning point soon.
New crop futures spent nearly three weeks trading narrow ranges, 20 cents for November soybeans and less than a dime for December corn. While both stayed above April lows, such constricted movement doesn’t last forever, especially during the growing season. With crops in generally good shape, forecasts for warm and generally wet conditions for much of the next two weeks suggests the path of least resistance could be lower.
Barring a sudden shift in those forecasts, the only real hurdle for markets over the next six weeks is June 30 reports on acreage and June 1 inventories. Neither seems likely right now to be capable of producing enough bullish news to force traders to reset expectations.
Corn acreage could be a little lower and soybeans a little higher than USDA found at the end of March in its first survey of farmer intentions. But history and anecdotal reports don’t suggest significant changes are likely despite problems in in some areas.
Grain stocks data could produce surprises in a year when the coronavirus pandemic upended demand during the March through May quarter. But one source of uncertainty – the size of 2019 production – gained clarity after USDA in April and May released special surveys of northern states with harvest delays.
Soybean stocks look like they’ll come in around 1.42 billion bushels, down 250 million from June 1, 2019. The size of USDA’s adjustment for residual usage, a category used make adjustments from previous reports, is likely the only real question mark for beans.
Corn usage for exports and ethanol are mostly known thanks to weekly and monthly tracking reports. How much corn is fed to livestock is always difficult to predict, and this year is especially hard to forecast after COVID-19 closed slaughterhouses and forced livestock producers to alter expansion plans. June 1 corn stocks could run around 4.95 billion, following a disastrous quarter in the ethanol industry.
But with supplies of corn and soybeans far from tight, getting traction from the stocks data will be difficult. That leaves 2020 production as the real variable headed into what’s typically a make-or-break period for prices.
Weekly crop ratings from USDA chopped around a little recently, but remain good. USDA Monday reported 72% of the corn crop in good or excellent condition nationwide, which translates to a yield of 184 bushels per acre if conditions hold. State-by-state ratings, which normally produce a more accurate reading, suggest a yield of 181.2 bpa, compared to the “normal” reading of 178.5 the government used in its recent forecasts.
Another factor to watch is the Vegetation Health Index. This metric, weighted for key Midwest states, currently points to a yield of 177.4 bpa. But the VHI normally improves well into July and the most recent report is above average for mid-June.
Soybean potential also looks good so far. While the percentage rated good or excellent dropped in Monday’s report, it too is above average at 70% nationally. This equates to a yield this year of 54.4 bpa, but the state-by-state forecast is a little more realistic at 52.9, still easily a record if it holds. The VHI in key states, meanwhile points to a yield of 52.1 currently.
In a normal year, above average yields produce lower prices, at least until more is known about new crop demand. This year is anything but normal, of course. The massive injection of money by the Federal Service into the economy, along with a few trillion of new government spending has some worried about inflation. Gold has been the main beneficiary of this sentiment so far, but there’s always a possibility investors could take a long overdue look at other commodities. China could also follow through with its trade deal promises as well. Hedge funds turned bullish on soybeans in Friday’s Commitment of Traders report and also covered some of their record short position in corn.
But those themes likely will have trouble gaining traction without a threat to overall supplies. And nothing suggests anything but good production right now.
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