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May 5, 2020
Sailors on a sinking ship will take any lifeline they can get. For foundering corn and soybean markets, the best chance to avoid going under may be a helping hand from a corner of the trade that has a few leaks in its own hull these days: wheat.
Hopes for a wheat rally surfaced in March and April. First, rumblings big Black Sea exporters would halt exports due to the COVD-19 pandemic triggered a burst of short-covering from bearish fund managers, with gains last month spurred by an untimely hard freeze on the central and southern Plains. Wheat futures in the aftermath of the gains weren’t exactly gangbusters, slipping 35 cents from recent highs. But they’re faring better than corn and soybean markets hovering above contract lows.
Whether wheat can avoid joining corn and soybeans in the abyss could depend in the short run on what USDA says in its May 12 World Agricultural Supply And Demand Estimates. While this report includes the agency’s first monthly forecasts for 2020 crops, only winter wheat’s numbers will contain data from farmers and their fields about production. New crop corn and soybean yield estimates typically are just derived from statistical models assuming normal weather, good planting progress and March 31 acreage intentions.
For wheat, however, both supply and demand are in play, not only in the U.S. but around the world.
Damage to hard red winter wheat from the April cold snap showed up in weekly progress reports and Vegetation Health Index analysis. Kansas lost around four bushels per acre of yield potential. Fields in Colorado, Oklahoma and Texas also slipped a bushel or two.
Soft red winter wheat fields in the eastern Midwest escaped the freeze, pointing to a vast improvement from their disappointing results of 2019. This helped slash 40 cents off SRW’s premium to HRW. Overall national winter wheat yield potential ranged from around 48 to 52 bpa, slightly less than a year ago, when final yields were the second highest on record at 53.6 bpa.
Freeze damage is notoriously difficult to quantify until results come in off the combine in summer. Shifts in abandonment can also be large, so production is the number to watch. USDA’s May winter wheat production estimates historically are a jump ball: Half the time the final number is lower, half the time higher, and changes some years reach double digits. Right now it appears the winter wheat crop is about 1.26 billion bushels, around 45 million less than 2019.
With less than four weeks left in the old crop wheat marketing year, USDA’s April forecast for 970 million bushels of leftover supplies on June 1 looks on track. Domestic usage likely won’t change much in the year ahead, leaving exports as the swing factor on the demand side of the balance sheet.
Prospects for sales abroad could benefit a little from pandemic stockpiling by big importers feeling vulnerable to export restrictions from Russia and Ukraine. And how much key competitors in the Northern Hemisphere have to sell could make buyers more nervous.
Dry weather across much of the continent and an unusually warm winter in Russia’s western wheat belt could chop as much as 4% of world wheat production. While that may not seem like much, it amounts to 1.2 billion bushels, enough to lift U.S. export prospects by 150 million bushels, taking carryout to 800 million bushels or less. This might not be enough to generate a huge rally but could perhaps help the market hold the line into harvest.
The last official estimate from the European Union put the crop there down around 8%, in line with estimates from the VHI last week. Losses in Russia could approach 10% with production down even more in Ukraine.
USDA likely won’t be as aggressive with its reductions and timely rains this week could improve the outlook depending on how the rest of the growing season plays out. That could leave corn and soybeans on their own, with each facing uncertain prospects.
Corn has old and new crop woes
Traders must mull both old and new crop outlooks for corn, which was hit hard by losses in ethanol caused by the crash in crude oil prices and gasoline demand. USDA in April cut its forecast for usage to make the biofuel by 7%. That looks close based on the latest ethanol production data, though the Energy Information Administration put the fuel ethanol decline at 9% last month, in line with the drop in gasoline consumption caused by stay-at-home orders around the country. Plant margins remain in the red but improved last week on higher ethanol prices and weaker corn basis after record closures in the industry lifted apparent efficiency – gallons produced per bushel of corn – to a record in March.
Feed usage was the bright spot of the old crop picture. But that too was upended by the pandemic as farmers destroy animals they can’t sell to closed slaughterhouses. Corn exports are down from a year ago but are holding to USDA’s April forecast so far.
As uncertain as that outlook is, corn’s real problems come from new crop. At its forum in February USDA pegged 2020 marketing year carryout at more than 2.6 billion bushels. And that was before the March plantings report upped acreage estimates by 3 million, with old crop beginning stocks also higher. Even if USDA is creatively optimistic with its demand forecast – something the pandemic makes harder—carryout could edge closer to 3 billion bushels.
The wild card could be updated production estimates expected for four northern states where farmers were still harvesting during USDA’s last survey at the end of 2019. But the new numbers won’t yet include results from North Dakota, perhaps the hardest-hit state.
Soybeans face more China questions
Treading water may be the best soybeans can hope for right now. USDA in April raised its forecast for old crop carryout by 55 million bushels to 480 million due to weaker exports in the first half of the marketing year. China has started buying both old and new crop supplies to fulfill part of its Phase One trade deal obligations, but overall exports are still behind the pace suggested by USDA. Renewed tensions between the U.S. and China over blame for the pandemic are hard to quantify, but don’t do demand any favors.
Farmers in March indicated they wanted to plant fewer soybean acres than USDA’s outlook forum estimate. Still, larger old crop leftover supplies could keep new crop carryout above 450 million bushels, not enough to sustain rallies without a weather threat or improvement in broader financial markets.
A wheat rally would help. But it’s far from clear whether the data will support those gains and their spill-over effect given all the other bearish forces at work.
Knorr writes from Chicago, Ill. Email him at [email protected]
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
Contributing market analyst, Farm Futures
Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and Commodity Trading Advisor. A journalist with more than 45 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.
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