Fall 2019 agricultural market letter from Chad Burlet.

With Thanksgiving fast upon us, we thought a Fall Market Letter would fit in nicely.

For agricultural markets the “U.S. Harvest” and “U.S.-China Trade Talks” have shared top billing for the past two months. We would categorize both of those topics as highly variable. Adjacent fields have had sharply divergent yields, and administration officials have had sharply divergent statements. With 24% of the corn and 9% of the soybeans yet to be harvested, and four weeks until the next round of tariffs, the final chapter in both stories is yet to be written.

The current NASS yield estimates of 167 for corn and 46.9 for soybeans are down 9.4 and 3.7, respectively, from last year. There is a sense in the Midwest that this year’s difficult weather hurt soybean yields more than corn yields, but that is only marginally reflected in the national numbers. With far more of the corn yet to be harvested, those yields would appear to be at the greatest risk. In fact, we are hearing a significant number of reports that the late planted corn is suffering from low test weight and that it is not drying in the fields. Farmers are facing large drying costs or moisture discounts if they harvest the wet corn.

With production and carryouts that are more than adequate, the cash markets of both corn and soybeans have surprised many with their strength. Basis levels in all markets are above their historical averages and, in some cases, they’re at record levels for mid-November.

Farmers know that production is down and they’re very dissatisfied with the current price. The second round of Market Facilitation Program  (MFP) checks (Federal money to compensate farmers for trader war) is going out this week, which will allow them to further delay the selling of their crops. There was fear that the movement of low-quality corn which can’t be stored would break the basis, but that has not been the case.

It is our opinion that the corn market is in the process of putting in a bottom. Unlike the previous four years, we are seeing a relatively efficient convergence of cash and futures in the United States. As such, any further upward movement in the cash markets will be supportive to futures. We expect farmers to sell rallies, as they did last week, so the price recovery will be uneven.

For the past year the U.S. has had great difficulty competing in the export corn market. Excellent crops in Brazil, Argentina and Ukraine put the U.S. in the role of residual supplier. Fortunately, we are seeing signs that this is changing. The domestic market in Brazil is firming and that is pushing their export prices higher. Argentina and Ukraine are following and the U.S. price disadvantage has dropped from $15/metric ton (MT) to roughly $4/MT into Asia. Not surprisingly, U.S. export sales are slowly starting to pick up. We’ve had two daily sales announcements this week alone. The U.S. Department of Agriculture’s export estimate for the year is still a bit on the high side, but it is much closer to reality than it was two months ago.

While our government’s estimate of corn exports still leans to the high side, their estimate of feed demand is far too low.

With Grain Consuming Animal Units (GCAU) up 2% their feed and residual estimate is down 343 million bushels from last year. Some of that is due to last year’s inflated residual, (which will be corrected in January when they lower last year’s crop size), but we still think their feed number is 150 million bushels too low. Another important factor for the corn balance sheet is the poor quality that we mentioned above. Farmers are starting to harvest corn that they planted in June and a number of areas are reporting low test weight. North Dakota is particularly hard hit with some test weights coming in 10-15% below normal. Whether that corn is run through an animal or an ethanol plant it will yield far less than 58-pound corn.

While we believe corn is carving out its harvest lows, we still see two significant risk factors which could weigh on both corn and soybeans in the long term. The first factor is ASF, it has decimated Chinese demand and it has now been found in wild boars near Poland. If the disease spreads into Europe their feed demand will suffer. The second factor is currencies. Both the peso and the real are near all-time lows and South American farmers are getting a strong signal to plant from fence row to fence row. Also, the new administration in Brazil is very supportive of bringing more land into agricultural production.

Chad Burlet is Co-Founder (along with Bob Otter), Chief Trading Officer, & Principal, Third Street Ag Investments, LLC