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Market Commentary for 7/12/20
Observations from Latest USDA Report:
The USDA updated their balance sheets with the new acres reported on June 30th. The following chart shows only the categories I think most affect final carryout. The green and orange columns are the July 10th USDA numbers while the blue columns are my estimates of possible yields and demand going forward.
It seems difficult for the USDA to know exactly how many on farm bushels farmers are using for feed each year, so this estimate could potentially change some eventually. I think the USDA has still overvalued US feed demand even with a drop this month, so I’ve decreased it slightly in my estimates.
Covid-19 is still having a major impact. If schools are not back to normal this fall more people will still be working from home. Less commuting means a continued reduction in gas and ethanol consumption. The latest estimates show gas consumption close to 80% of normal. The USDA is estimating a grind for the next marketing year that is close to 93% or normal. In my opinion there is more downside risk than upside potential within ethanol demand on the balance sheet and its why I have lowered the demand in that category.
I still expect another 50-million-bushel ethanol reduction in the August USDA report, which would increase carryout for both the 2019 and the 2020 crop year too.
I kept export numbers the same as the USDA’s estimates, because lower prices should encourage more exports.
If the weather would turn hot and dry over the next few weeks, yield could be reduced. However, it’s unlikely carryout will get back to pre-Covid levels without a major widespread drought, and only 10% of corn is under drought conditions currently.
If weather improves over the next few weeks, national yield could still be above the trendline. This could then push carryout to 3 billion bushels and force futures to re-test the $3 lows.
How Likely Is $4 Corn?
It will take an unforeseen event that causes a supply disruption or a tremendous demand increase. Even a national yield reduction to 170 will only help prices rally so much, because higher prices will reduce the export demand reported by the USDA.
Similar to the corn chart above, the latest USDA numbers are shown in green and orange with my estimates in blue.
The USDA added a few bushels back to the residual category which raised the 2019 carryout. There will always be debate as to why these bushels were added back.
Fortunately, while the USDA did find some bushels in the residual category, they offset much of it with increases in meal demand for both last year and this upcoming marketing year. Those values seem very reasonable today.
What Will It Take for A Bean Rally?
It will come down to export pace and yield potential.
The 2020 USDA forecasted export pace is below pre-trade war levels and they are not yet planning for any extra purchases in a Phase 1 trade deal. Upside potential could be very high if the Phase 1 trade deal was met, but recent statements this past week from the President do not suggest that trade relations with China are moving in a positive direction.
August weather makes or breaks the bean crop. A slight yield reduction could rally beans to the high $9’s or even above $10 with high export demand. On the flip side, good weather and limited export demand could mean prices testing the $8 level.
As of Sunday night, the corn market is down another 7 cents due to more favorable growing conditions than last Thursday's forecasts. Weather will be a major factor for the next 1-2 weeks for corn and up to 4 weeks yet on beans. Export pace will also be a consideration, especially for beans, while corn needs to just stay on track with the USDA estimates.
The market will continue to be volatile as weather forecasts change daily. There is still a 30 cent weather premium built into the corn market. However, with the information we have today, the market doesn’t look as dire as it did a month ago and it seems difficult for futures to trade $2.50. I think even sub $3 corn futures are unsustainable for any length of time. Low prices are the cure for low prices and $3 should attract a lot of buyers if we get back to those levels.
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