Grains were sharply higher Wednesday, with hogs mostly higher and cattle sharply lower.
Corn Rallies on Bullish WASDE
Corn futures ended 20-cents higher with help from wheat and the bullish data from the August WASDE.
Corn yield was cut by 2.3 bu. per acre from July to 180.7 bu. and also below trade expectations. That offset a 1.2 million acre increase in harvested acres and resulted in a production figure nearly static with last month at 16.013 billion bu.
Dave Chatterton of Strategic Farm Marketing says last year USDA provided fireworks for the market with a big increase in corn yield as well as acres.
“We didn’t get that degree of a change this year. We actually got a price reaction that was a little bit larger than the reaction that we saw on the bearish side last year,” he says.
USDA also increased corn exports by 75 million bu. on old crop and new crop which resulted in new crop ending stocks falling to 1.653 billion bu. a drop of 137 million bu. from last month.
“We’re still seeing carryout get smaller, you know, from a report to report going forward. And we look at what’s happening with that new crop balance sheet with a 1.6 and change billion bushel type of a projection there. You’re right at that 10% stocks to use ratio number. And that’s a number or a ratio that’s often cited by people in the market is kind of a make or break for a bull versus a stable market.”
He says once prices slip below that level prices really react.
How How Could Corn Prices Rally?
So with the tight stocks to use ratio on corn any cuts going forward to yield or increases to demand will garner positive reaction.
He says, “If China does end up buying any U.S. corn, certainly we could get ourselves into that territory and the trade and price has to account for that.”
So is $5 corn in the cards at this point?
“I certainly think it’s possible, Michelle,” says Chatterton, but he maybe not with harvest coming on in just a few weeks in the Midwest.
So he thinks the market will see harvest pressure and then stage a nice post harvest rally.
“I can see us going to maybe, as low as probably, $4.30 or $4.40 on the Dec contract and then finish above that $5 mark. So certainly I think
we’re going to take a run at that value. It’s just the timing that is always the key here,” he adds.
State By State Data Indicates Lower Corn Yields Ahead?
Looking at the state by state corn yield breakouts there are some inconsistencies worth nothing that will make it difficult to achieve the USDA’s current national yield.
Iowa is pegged at 216 bu. per acre, up six bu. from last year, while Illinois is at 212 and down just two bu. They are doing the heavy lifting and making up for notable losses in the Western Corn Belt, in which the predominant states are all much lower than a year ago.
Chatterton says that may mean additional cuts in the national corn yield moving forward.
“Yeah, I think there’s a lot to argue there with USDA and their state yields. And granted, it’s a tough job. I don’t want to be too hard on them. But when we look at what’s happening in our part of the word in Illinois, we’re certainly well below what the USDA is talking about in both corn and beans. I think when you look at Iowa, you can argue that the numbers there are probably too high as well,”
If both Iowa and Illinois see a drop in yield it will take the national yield below 180.
“We’re at a 179 in our shop right now on a corn yield,” he says.
Soybean Yields Down to 52.7 BPA
For soybeans, USDA lowered yield by .3 bu. per acre to 52.7 bu. which helped offset the 1.4 million acre increase in harvested acres. That resulted in a 44 million bu. increase in production to 4.519 billion bu.
However, Chatterton thinks the yield could get shaved moving forward and his firm is at 52 bu.
He points out there will be a lot of changes between now and the final yield determination and the August report is just a the first card that gets dealt.
“In terms of the state by state yields there’s going to be a lot of wrangling and changes as we go forward and that’s just a normal part of the process but I think right now the odds favor that those numbers get smaller over time,” he states.
Soybean Ending Stocks Up Slightly, But Still Tight
USDA left exports static in the report but did raise crush by 30 million bu. to offset the higher soybean production figure.
The result was a 10 million bu. increase in ending stocks to 320 million bu. but still a tight supply situation.
“That on its own is a little bit snug, but I think if we throw in the propensity for potentially some yield cuts that we just talked about, the bigger factor probably is China. And if China does indeed take this 25 million metric ton commitment, the full commitment, I should say, that’s been talked about, I’m not sure that the USDA has that fully accounted for in their balance sheet. And it continues to kind of tighten up this balance sheet, get you in a sub 300 situation.”
He says that would be supportive for farm margins and prices.
China Demand
USDA currently has China demand at 16 MMT of the 25 MMT that Beijing committed to.
“China is always a big question mark. And when they’re going to take this product, how much they’re going to take versus how much they’re going to ship. There’s going to be games that are always played. But at the end of the day, you know, we continue to hear from our sources in China that they probably are likely to take that amount of soybeans. probably likely to take at least some corn as part of the $17 billion and other ag commitments.”
President Trump and President Xi are set to meet in Washington D.C. on September 24 and there may be good will purchases ahead of that.
If China does buy and ship the whole 25 MMT of soybeans from the U.S. on top of the record crush pace of 2.78 billion bu. then the ending stocks fall well below 300 million bu. in a hurry.
State Soybean Yields
The state-by-state breakouts, showed Illinois yield at 67 bu. per acre, up 4.5from last year. Iowa, at 62, down 1.5, but yet corn was up 6 bu. there which doesn’t make sense.
“It’s a little bit of a head-scratcher for us as well here. I would argue with that Illinois bean number and where it’s at, we’re at 60.5 internally on our own models to just give you a mark,” says Chatterton.
Still he thinks most Midwest producers, particularly those in Iowa and Illinois, are more excited about their prospects for yield potential on beans than they are in corn.
He states, “I think Iowa has a much better corn crop as a whole than what we see in Illinois. It’s much more consistent. But even at that, I think the beans here are going to be the performer this year in terms of yield.”
WASDE Neutral for Wheat
USDA changed very little with the domestic balance sheet and ending stocks were lowered just 5 million bu. to 717 million bu.
The global wheat stocks were also up only .4 MMT to 273.3 MMT.
Wheat Rallies on Black Sea Export Concerns
Wheat was up 22 to 23 cents but it was not trading the report and was instead focused on the war in the Black Sea.
Ukraine drone attacks overnight halted grain terminal operations in Russia’s largest port and there are now three ports that have damage and are unable to move grain.
Chatterton says, “Unfortunately things continue to get worse not better in that situation. We had Ukraine on Wednesday attack three Russian ports in the Novo region that’s their biggest export region responsible for about a third of their overall total exports.”
He says with Kerch Strait is impaired already and now the Novo situation has exports down in same cases by more than two thirds versus where they were this month, a year ago. So we’ll have to see how the whole situation works out.”
USDA did account for some of that loss by cutting back on Russian and Ukrainian corn and wheat export projections.
The crops are not smaller but the inability to ship needs to be priced into the market.
Strong Technical Closes
Corn, soybeans and wheat posted strong technical closes on the combination of the WASDE and addition of geopolitical premium.
“I think corn on its own has the most constructive principal view of the balance sheet in terms of the analysts vgoing forward here that tends to get the most attention. So I think that there’s some spec money that’s now starting to get interested. I think, you know, we were probably in a situation where, you know, large capital managers were looking to position long after the USDA report on a dip. They didn’t get that now. And the question is, you know, do they find a place to enter here at a higher value or how patient they’re going to be?”
However, even with the strong technical picture he thinks the market needs a bigger spark to start a fire.
Cattle Fail
The cattle futures were down sharply on Wednesday after failing in the October live cattle at the 200 day moving average.
However, Chatterton says says the market is technically showing some warning signs.
“We just couldn’t build on those gains that we had had from Friday and Monday. Open interest during that period when the market was trying to go higher, it was actually falling off pretty sharply. That’s certainly a caution sign if you’re a trader in the marketplace or an investor. You want to see people coming into the market when we’re going higher. And instead, we saw people using that as an excuse to get out,”
He says the 200-day moving average at $228 level and then some resistance at $230 also capped the rally in live cattle.
The slaughter rates have also been down significantly over the last several weeks. “We haven’t seen much of a rally in the cutout and cash so far this week. It’s been a pretty light test, but packers bought a lot of cattle last week. They seem to be having their hands in their pockets, at least so far this week. Steady at best looks like the cash trade for right now. And I think there’s a little bit of pressure in the market here seasonally.”
He says the cutout is stalling out which may limit cash and the upside in futures.
