USDA threw the corn market a curve ball in the July World Agricultural Supply and Demand Estimates (WASDE) report released Friday, and it was a good one with an unexpected cut to old crop corn stocks through increased demand.
Here’s a snapshot of the surprise changes:
· USDA projects corn ending stocks to fall to 1.877 billion bushels, down from 2.022 billion last month
· USDA raised old crop exports by 75 million bushels
· The agency also increased feed usage by 75 million bushels for old crop corn
· Increased new crop corn feed usage by 75 million bushels
Joe Vaclavik of Standard Grain says the substantial increases to old crop demand forecast came out of nowhere.
“It was about the friendliest report you possibly could have received from USDA today,” Vaclavik says. “They added hundreds of millions of bushels of demand. A lot of it was old crop, there was a little bit of a new crop. Relative to expectations, it’s a friendly deal, because that demand that they added for old crop, that’s real demand. Everything on the new crop balance sheet — the yield the acres, the demand — that’s all smoke and mirrors. That marketing year hasn’t started yet, but the old crop stuff is real. And you can take it to the bank.”
However, the markets were unimpressed by the friendly adjustments that came as a surprise to demand. Vaclavik says the report was friendly compared to what it could have been, but corn prices barely inched into the green, with the September corn contract closing 1 ¾¢ higher at $4.02. New crop December contract finished up 4¢ at $4.14 ¾ .
Peter Meyer of Muddy Boots Ag says he doesn’t trust the demand numbers. He anticipated USDA would increase demand, but it was a matter of where, and he says he just doesn’t trust the demand side at this point.
“One of the more telling things to me is that I always look at year on year supply versus demand, and especially in corn, there’s a very high correlation between changes in supply and changes in demand. Total supply now from 23/24 to 24/25 is up 270 million bushels. Demand is up 50. This is very telling to me, because typically during the year, they will adjust that by 50%. And we did a 25-year study where actually the correlation is probably closer to 85%. But the fact that they did not use their 50% rule and increase demand by 135, and only increase it by 50 suggests to me there’s very little confidence in their demand numbers.”
Even with the surprising adjustments to demand in the July WASDE report, the factor haunting the grain market is the fact farmers are holding on to 3 billion bushels of corn in on-farm storage. That’s what USDA’s June Grain Stocks report revealed. And at 3 billion bushels, that’s the highest level of on-farm storage since 1988.
“The general narrative among traders and analysts is that the market cannot rally in a material fashion until that stuff is sold,” Vaclavik says. “I don’t know if that necessarily has to be the case. If you see demand enter the marketplace in a material fashion, and I think it’s got to be on exports, I think that’s what could move the needle real quickly.”
Vaclavik says U.S. corn prices are competitive on the global market again. So, if China or some big buyer came in and really wanted to buy U.S. corn, he says the situation could change, and it could eat into the 2 billion bushels of old crop carryout USDA is currently estimating.
“The new crop marketing year hasn’t started yet. I still think overall, this report today, it was a friendly item. The on-farm stocks issue isn’t, but we did get some good news today,” Vaclavik says.
Meyer says the battle in the market right now is almost a game of chicken between the farmers holding on to a large amount of crop grain, and the funds being record short.
“The funds really don’t have a fundamental view, to be honest with you, they are still trading the path of least resistance, and the farmers are holding on for higher prices,” Meyer says. “I agree with Joe, and this is a friendly WASDE report, but how friendly can it be? $4? $4.25? $4.30? Is that going to get the corn out of the farmers’ hands? I don’t know.”
He says the funds will keep selling and stay short until the farmers capitulate and start selling the corn they have stored in the bin.
“Funds are not stupid,” Meyer says. “They saw those 3 billion bushels in on-farm storage, and they know what’s going on.”
USDA left yield for corn and soybeans unchanged in the July report, which wasn’t a surprise. For new crop, USDA currently has yield and production forecast as:
· 181 bu. per acre yield for corn with corn production forecast at 15.1 billion bushels.
· Soybean yield pegged at 52 bu. per acre and production at 4.4 billion bushels.
When could USDA adjust yield, and how big of a yield could we see? Plus, why is the corn market immune to the storm that caused widespread hail damage in Nebraska and parts of Iowa this week? Vaclavik and Meyer discuss in the video below.
