Corn and soybeans purchases keep climbing, but they haven’t yet offset big supplies
The old market adage is that big crops get bigger through the growing season. If that’s the case this year, the 2016 corn and soybean crops will blow the previous records out of the water, as USDA’s Aug-ust crop estimates are forecast to be the biggest ever.
USDA forecast the corn crop at 15.15 billion bushels on a national average yield of 175.1 bu. per acre. The soybean crop is forecast at 4.06 billion bushels on an average yield of 48.9 bu. per acre.
Record production means supplies will swell in 2016/17. Total corn supplies in the new-crop marketing year are projected at 16.91 billion bushels, which is 1.51 billion bushels (9.8%) more than 2015/16. To offset the bigger supply, more demand is needed.
USDA has increased its total-use estimate by 808 million bushels (5.9%) from 2015/16 to 14.5 billion bushels. USDA forecasts year-over-year increases in exports (up 13%), feed and residual use (up 9.1%) and food, seed and industrial use (up 1.3%).
Corn-Demand Hurdles. Yet the anticipated increases in demand aren’t nearly enough to offset the anticipated surge in supplies. As a result, corn ending stocks are set to swell by 703 million bushels to a hefty 2.41 billion bushels in 2016/17. At that level, the market is more than comfortably supplied with corn. With corn supplies expected to push out to “burdensome” levels during the 2016/17 marketing year, the market’s job is to find even more demand.
One way that could happen is if there’s a supply scare, such as a crop problem in one of the major production countries around the world. Yet with total global grain supplies already record-large and expected to rise nearly 24 million metric tons to 943 million bushels in the 2016/17 marketing year, it’s unlikely there would be enough of a crop problem to spur massive panic-buying among global end-users.
The other way to encourage more demand is through a period of lower prices. Given the makeup of the market, this is the most likely scenario to build demand. USDA forecasts on-farm cash corn prices to average $3.15 during the 2016/17 marketing year, 45¢ under the 2015/16 average price.
The need to build demand through lower prices limits the likelihood of an extended price rally in the corn market, but it doesn’t mean prices will be under constant pressure. In fact, the corn market typically posts an early seasonal low in big crop years, as the anticipation of hefty new-crop supplies causes prices to fall well ahead of harvest.
As prices fall, demand builds, triggering a price recovery from an early fall low. The corn market is already seeing this happen, as the sharp drop in prices since mid-June has triggered a strong response from end-users around the globe.
Less Soybean Pressure. In the soybean market, total supplies are projected to swell by 201 million bushels (4.1%) to 4.35 billion bushels in 2016/17. Total demand is forecast to increase as well, but only by 127 million bushels (3.1%) to 4.02 billion bushels. Therefore, soybean ending stocks are forecast to rise to 330 million bushels during the 2016/17 marketing year, representing a gain of 75 million bushels (29.4%) over year-ago figures.
At that level, soybean supplies are comfortable. Yet the supply situation doesn’t feel as burdensome for soybeans as for corn. Part of that comes from USDA’s tendency to underestimate demand and overestimate carryover. Part of it is because there are only three major suppliers of soybeans—the U.S., Brazil and Argentina. If South America has a crop problem in 2016/17 (for example, La Niña is expected to be established by fall and to last through winter), the U.S. would be tapped to ship an ever greater supply of soybeans to the world. Plus, the U.S. soy processing industry has proven it can keep pace with exports when there are ample supplies available to be crushed.
Traders are less comfortable with an ample ending stocks forecast for soybeans than they are for corn. It will be easier to find additional soybean demand than corn use in 2016/17.
USDA Reality Check. Numbers from USDA over the past 20 years signal there’s an even chance of the corn crop rising and falling from its initial August estimate. During that span, USDA’s average “miss” on its August crop estimate has been 313 million bushels. The smallest deviation from the August estimate to the final total was 16 million bushels, while the largest variance was 940 million bushels.
In the case of soybeans, USDA’s August crop estimate fell below its final figure in 13 of the past 20 years and landed above the final for seven years. That suggests there’s a two-thirds chance USDA’s August crop estimate is not the highest the market will see this year. Over the past 20 years, USDA’s smallest miss on soybeans was 6 million bushels, while its largest difference between the August estimate and the final tally was 408 million bushels.