Grains ended higher on Friday after the July WASDE, cattle were lower.
Corn Gets Friendly WASDE
Corn futures ended 8 to 9 cents higher on Friday on the heels of the sharply higher wheat market and friendly numbers in the July WASDE.
Arlan Suderman, chief commodities economist with StoneX, says USDA lowered world stocks by 6 million metric tons (MMT) to 275.26 MMT, which is also nearly 23 MMT below last year.
A big portion of the 6 MMT cut from USDA lowering EU corn production by 3.7 MMT due to their record heat and drought.
U.S. Corn Stocks Tighten
USDA also lowered U.S. old crop ending stocks by 125 million bu. to 2.02 billion bu. due to lower quarterly stocks.
New crop ending stocks were also lowered 170 million bu. from June to 1.79 billion bu. which was also below trade expectations. However, Suderman doesn’t agree with how USDA achieved those results.
“USDA raising feed usage by 150 million bu. to 6.35 billion bu. and you cannot defend it. We’ve increased it about 17% year on year when growing animal units only justifies maybe a 2% to 3% increase.” he says.
The quarterly stocks have been coming in below expectations.
“That means either higher feed use or it means USDA overstated the size of last year’s crop. But once they report the size of last year’s crop in their January report, they don’t want to touch it again until September 30th when we’re focused on the new crop. So they couldn’t change that. So they were just left with feed usage,” he adds.
While the U.S. is not going to run out of corn, the 1.79 billion bu. new crop ending stocks number is tighter and getting closer to that pivotal 1.5 billion bushel area.
“That’s kind of where it wouldn’t take much of a yield cut due to adverse weather or unanticipated Chinese buying of corn to get the market excited,” he says.
No Room for Error
USDA shrunk the ending stocks without any change to the 183 bushel per acre trend line yield. However, there is growing speculation that number needs to be lowered.
Suderman is not confident in that happening.
“I know farmers aren’t going to want to hear that. If you look at some of the major services out there who supply the funds with their yield models, right now they’re at anywhere from 184 to 186. And so the potential is still there. And when you look at how the weather models have shifted more mild, that helps facilitate that.”
While it is a long growing season, he says the data doesn’t justify a lower yield and it could go either up for down from current levels.
“I think it’s just too early to know and USDA was probably justified to leave it there for the July report until they get better data in August.”
Wheat Soars But Not Report Reaction
Wheat soared 18 to 22 cent on Friday, but not because of the report data.
While global stocks were lowered 2.6 MMT to 272.8 MMT, U.S. wheat production was only down 7 million bu. from last month to 1.536 billion bu.
That is still the smallest wheat crop in over 50 years, but it was below expectations and disappointing to the trade.
USDA offset the 900,000 cut to wheat acres in the Acreage Report with a .9 bu. per acre increase in yield.
Suderman explains, “If you look at losing a million acres in the June 30th report, you would have anticipated a bigger drop in production. But spring wheat production came in higher than expected. The spring wheat yield better than expected. And the spring wheat crop looks pretty good right now. So that resulted in an increase in the overall wheat yield. So even with the lower acreage, we didn’t lower the production as much as what could have seen happen.”
Wheat Needs to Buy Acres?
With harvested wheat acres the lowest in 149 years, Suderman says the market may need to rally to get farmers to plant additional acres this fall.
“As we approach the fall planting season, the wheat market needs to buy acres to sustain where we’re at because we’re trending lower on stocks. But if you look at fertilizer prices, even though they’ve came down a lot. With today’s wheat prices, it’s pretty ugly on a historical basis how many bushels it takes to buy that fertilizer. And so we need to either see wheat prices go up, which ends up hurting exports, or fertilizer prices come down ahead of fall planting.”
Russian Export Disruption
The big rally in the wheat came instead on news of a hiccup in Russia’s wheat exports.
Suderman says traders were adding risk premium as escalating tensions between Russia and Ukraine led to shipping disruptions in the Sea of Azov. Ukraine has reportedly struck a number of Russian tankers in the Sea that is connected to the Black Sea.
“The expectation was that it’s just for the weekend. If the market truly believed it was a permanent or long term shutdown, we would have been up the limit on Friday and possibly even again to start the new week.
With the funds short in the wheat market that also resulted in some short covering.
WASDE Slightly Friendly for Soybeans
USDA did not make any major adjustments in the soybean balance sheets.
Yield was left at 53 bu. and production was raised 40 million bu. to 4.475 billion bu. which accounted for the 665,000 acre increase in plantings.
However, new crop ending stocks were unchanged as 310 million bu., which was below expectations.
Suderman says, “USDA got there by raising old crop exports by 10 million bushels. They could have gone higher. I think they could have gone another 20 million bushels higher based on the current pace of export shipments. They could have gone another 15 to 20 million bushels higher on crush as well. They chose not to. They raised new crop soybean exports by 30 million bushels. That may prove to be true. It all comes down to how much does China buy, but we simply don’t have the data to justify it.”
The bottom line it is still an adequate supply but the U.S. is in a position if yield drops even 1 bu. due to adverse weather or China buys more than the 16 MMT USDA has in their balance sheet, it becomes bullish he adds.
Weather in August will also be a factor.
China Buys U.S. Soybeans
Chin bought 9.7 million bushels of U.S. soybeans on Friday, for a total of 32 million for the week.
But how much has China bought of the 25 MMT they committed to and what do they need to buy on a weekly basis to hit their target by Dec. 31?
“They’re getting close to the 10% level of that 25 million metric ton commitment. So that’s a start. That’s what we would anticipate them doing at this time of year if they’re going to work toward that. What we hear on the ground in China is they want to get at least 15 million metric tons of U.S. soybeans imported by the end of this calendar year as a show of good faith,” he says.
The timing of that is significant according to Suderman.
“President Xi has three more meetings potentially with President Trump this calendar year. So he knows that if he’s not showing progress toward the 25 million metric tons, Trump will put pressure on him. This helps keep that pressure off.”
Why December 31? Suderman says that’s after their three additional meetings.
“But it’s also the next week is when the new Congress starts. If President Trump loses the Congress in the midterm elections and the new
Congress handcuffs him on his trade pressures, then President Xi may not need to buy anymore. If President Trump gains strength in Congress, then they may have to go ahead and buy that extra 10 million metric tons. So to me, that’s my interpretation. That’s why the target date, end of the calendar year, 15 million metric tons. kind of makes sense and where they’re at,” he further explains.
USDA already has about 16 million metric tons built into its balance sheet.
What Will it Take to Sustain $12 Soybeans?
Suderman to sustain a rally above $12 or take out the contract highs the soybean market will need consistent business from China.
“Unless we have a smaller crop because of adverse weather, you’re exactly right. And then the other question is, what about the other $17 billion? We ought to start seeing some progress in non-soybean products up to 17 billion here soon. Will it be corn? Will it be wheat? Will it be beef? What will it be to make up that $17 billion? Will they keep that promise?”
Those are the questions the market wants answers for.
