With less demand U.S. farmers are planting less, reports Chad Burlet.
If there was a message from Tuesday’s USDA acreage report it was that price, and price expectations, matter. Last year we had record planting delays and farmers continued to plant well into July because of good profitability and the expectation of even higher prices. This year it was unprofitable to plant and Covid-19 driven pessimism was rampant. The result was a record five million acre drop in corn acres from the March report. The eight major crops dropped a combined 7.1 million acres in that three- month period.
After an extremely quiet month the corn market exploded in the final two days of the quarter. From June 1 to June 26 December corn futures had a 26¢ range; on June 29th and 30th its range was 31¢. That acreage surprise was the leading cause, but other important factors contributed. The old crop cash market has been above delivery values and there are persistent rumors of Chinese interest in buying new crop corn from the U.S. and Ukraine. Central U.S. weather had been generally good, but the forecast has turned decidedly hotter and drier. In addition, the futures market had a very large speculative short heading into the report.
All of those factors combined to fuel the rocket, but it was Tuesday’s shockingly low acreage number that lit the fuse. Analysts had been expecting planted acres to be 95.2 million and they came in at 92 million. Not only was that the biggest downside misses on record, but the five million acre cut from March to June was also the largest on record.
The Chinese corn situation has become very intriguing. China has been working to reduce their corn stocks for four years and there is evidence that they may have over-shot. July Dalian futures are expiring at a 28% to 30% premium to November futures. In addition, the annual auction of government-owned reserves has drawn unprecedented interest. Most years the government will sell 25% to 60% of what they offer in June. This year they’ve run five auctions with a total of 19.9 million metric tons (MMT) offered and they’ve sold 100% of that corn.
It has been profitable to import corn into China for years, so the rumors of recent purchases of U.S. and Ukrainian corn are very plausible. For China it would be an easy step toward Phase 1 compliance if they bought U.S. corn, but it would also begin to undermine their goal of maintaining farm profitability and slowing rural to urban migration.
While the corn market is heading into its fourth quarter, the wheat market is in the middle of the Northern Hemisphere harvest. For the world wheat market, it was a relatively smooth transition from old crop to new crop with the spot-to-August inverse gradually eroding from $30/MT to zero. The U.S. futures markets tracked world prices by losing 16 (Minneapolis) to 37 (Kansas City) cents/bushel (cpb). Chicago futures lost 30¢-35¢ outright and December futures lost 45¢ to corn futures. Despite that, wheat is still not competitive in domestic feed rations. Even with U.S. acres at 100-year lows, our 2020-21 wheat carryout is still burdensome.
The world wheat carryout is similarly bearish with stocks projected at record highs. More of the carryout has shifted to non-exporting countries like India and China, but it will take a significant Southern Hemisphere problem before the wheat market can tighten up.
Soybean acres were projected 300K higher than they were in March, but that was still 900K below the average of the analysts’ estimates. With stocks also slightly below expectations the soybean balance sheet is slightly tighter than expected and yields have taken on increased importance.
Chinese soybean demand appears fully recovered as their June crush was an all-time high. Despite near record soybean imports and that record crush, both soybean and soymeal stocks are close to their five-year averages. It appears that the USDA’s estimate of Chinese imports for the next 15 months is at least 3-4 MMT too low.
China’s massive program out of Brazil has quickly tightened up that market. On a FOB basis the United States is now 40-50 cpb below Brazil. European crushers have even started selling out their Brazilian cargoes and buying U.S. That has helped pull our CIF market up to 5-6 cpb over delivery values, which in turn has allowed the July-November futures spread to trade at an inverse. That is no small feat for a market with a 590-million-bushel carryout and a stock/use ratio near 15%. Brazil is on track for its fifth consecutive month of record exports. It appears that they will over-ship in the first half of their crop year and they’ll need to import soybeans to crush in December.
Chad Burlet is Co-Founder (along with Bob Otter), Chief Trading Officer, & Principal, Third Street Ag Investments, LLC
