While farmers and traders focus mostly on prospects and plans for 2020 production, USDA’s April 9 report will have none of it. The agency’s first monthly take on new crop corn, soybeans and wheat won’t come out until May, leaving the upcoming update to wrestle with the grim prospect of how the COVID-19 pandemic will affect already beleaguered markets.
“Who knows?” is the most honest answer these days for anyone trying to assess anything, much less the fundamentals of supply and demand in a world under house arrest. That may limit both USDA’s desire and ability to make major changes.
Corn braces for bad news
Corn looks to absorb the brunt of the fallout, reflecting futures trading near three-and-a-half-year lows. While the agency’s bearish March 31 forecast for prospective plantings of 97 million acres bears some of the blame, most of the damage comes from the collapse of the ethanol industry in the wake of the Saudi-Russia price war and demand destruction caused by COVID-19. Another strong quarter of feed usage over the winter won’t be nearly enough to offset the woes of the biofuel industry, which should continue even if world crude oil producers agree to cut production.
Exports are a little slow but appear to be picking up steam thanks to rock bottom prices. My own model puts 2019 crop carryout at 2.06 billion bushels, up 168 million from the government’s last forecast, and generally in line with trade thinking.
Still to come for corn, likely in May, will be results of USDA’s resurvey of fields unharvested when the last production estimate was released in January. That could trim the size of the 2019 crop, though losses may already be reflected in the strong feed and residual usage estimates put out in the lower than expected Dec. 1 and March 1 quarterly stocks data.
Soybeans face China questions
USDA may make only a modest adjustment to its forecast for 2019 crop ending stocks of soybeans, last estimated at 425 million bushels. My model is around 20 million bushels above that, with improved crush partly offsetting lower exports. But the 800-pound gorilla as usual is China. The trade war may be on hold for now, but the impact of the coronavirus kept the world’s largest soy importer out of the market for U.S. soybeans until recently, when terms of the phase one deal kicked in.
Total U.S. sales and shipments to all buyers lag the pace suggested by USDA’s current forecast by around 18% with the marketing year more than half complete. China’s most recent purchases focused on new crop delivery, a hint it may try to fulfill its obligation for the 2020 calendar year with beans coming out of the field this fall. The impact of the pandemic certainly would seem to provide plenty of wiggle room for the 2020 quota to be pushed into 2021 as well.
Is wheat rally over for now?
The trade on average expects no change in USDA’s forecast of May 31 ending stocks of 940 million bushels. Feed usage appears to be holding up, and exports, while a little soft, may ultimately benefit from COVID-19 stockpiling from nervous buyers worried about export controls by other major producers, including Russia.
Those fears triggered a steep but short rally in futures during the second half of March as funds covered short positions and even shifted to a small net long position in soft red winter wheat. With the world economy likely sliding into recession, bulls believe countries with less money to spend on food will favor cheaper products like bread and pasta. There is a modest correlation between weaker global GDP and increased per capita consumption of wheat, which occurred in the wake of the late 1990’s Asian financial crisis and the 2008-2009 market meltdown.
But most of the impact, if it occurs, would come in the 2020 and 2021 marketing years, one reason why the focus for wheat is now squarely on new crop.
USDA reports results of its first survey of production in May, but there are signs U.S. winter wheat is in good shape as fields begin growing again. The latest Vegetation Health Index for winter wheat projects to yields a half-bushel per acre more than last year at this time. The first weekly crop ratings of the season out April 6 also were above average, with results in line with reports from key states over the winter.
My projection for yields based on state-by-state ratings point to potential for average yields slightly better than the record 53.6 bpa achieved in 2019. A cold snap this week doesn’t look like it will do significant damage, though jointing in Kansas is ahead of last year’s pace.
Seasonal trends for July futures also aren’t promising. Futures failed to take out highs on the recent rally, and even in bullish years the market on average is flat into harvest. The market may need to see results off the combine in the Northern Hemisphere before deciding whether to take another leg higher.
Rallies into summer are the exception, not the rule, even in bullish years, when futures tend to be flat from April to June.
Winter wheat yield potential is lower than last year at this time from much of Texas through the Southeast but fields emerged from dormancy better in the key states of Oklahoma and Kansas, as well as on Pacific Northwest and Montana.
Few markets are escaping impact from COVID-19, including fertilizer. Questions about logistics in the face of business closures are putting pressure on a supply chain known for breaking down at the wrong time. Add in USDA’s forecast for 97 million corn acres and nitrogen could be disrupted in some parts of the country.
Though U.S. plants are making more products, they also increased exports of ammonia and urea in January and February compared to 2019 levels. Net imports were down 30% and 53% respectively. Wholesale costs at the Gulf for both nutrients are trading around the same level as a year ago after breaking sharply last fall.
Urea increased more than $10 a ton over the past week at the Gulf despite more signs of a weak international market. India’s purchases at its latest tender announced this week appeared less than expected, in part due to that country’s pandemic lock-down. In the meantime, China is starting to resume exports, which could put more product on a market that is having trouble figuring how to get it to where it’s needed.