Lower acreage and more usage
The crop markets received some price increasing news to conclude the month of June. USDA’s surveys showed a smaller than expected crop base this summer, along with continued strong usage both domestically and internationally. The Energy Information Administration found that the ethanol industry is producing at roughly pre-COVID levels. And drought conditions remain firmly locked in place across the western half of the country, including throughout the Northern Plains and into Iowa.
The big market movers for the end of the month were the acreage estimates. The markets had been preparing for substantial increases for both corn and soybeans, based on the drier conditions and the quick pace of fieldwork during the first third of the growing season. Figures 1 and 2 show the range of trader estimates for acreage and the USDA estimates from the Prospective Plantings (March) and Acreage (June) reports. For corn, the trade has consistently expected a larger acreage number than farmers have indicated in the USDA surveys. In March, USDA’s estimate was well below trade expectations. With the June report, most traders anticipated that USDA’s new estimate would rise above 93 million acres. And while USDA’s new acreage number was higher, it fell short of those trade expectations. That relative shift in acreage pulled 100-200 million bushels out of the trade’s production estimates and provided the spark for a limit-up day after the report release.
The soybean market experienced similar action, as the trade has consistently projected more plantings than USDA found. It was true in March and again in June. The main difference between corn and soybean acreage shifts turned out to be that USDA found slightly lower soybean plantings in June than was first indicated in March. But the end result is very similar, with expected soybean production lowered by 50-75 million bushels.
So now with the acreage totals firmly embedded in the market, the emphasis is once again settling in on the national yield projections. Through the May and June WASDE reports, USDA has held firm with their yield estimates at their weather-adjusted trendline yields. That also means that the drought conditions have not been worked into the yield estimates yet. Based on previous years, we can expect USDA to begin to incorporate any impacts from the drought on crop yields with the July WASDE report. Figure 3 displays the national drought monitor at the end of June. As we have discussed over the past couple of months, it’s the northern and western Corn Belt facing the largest impacts for corn and soybean production. The trade will be trying to assess the potential for the good to excellent crops in the eastern Corn Belt (Illinois and east) to offset drought losses to the west (Iowa and northwest). While the weather patterns did shift in June to provide some moisture to drought-stricken areas, it may have been just enough to meet crop needs and did not alleviate soil moisture issues. With the critical pollination stage coming up this month, additional precipitation in the droughty areas will be needed. So we should expect some additional price swings, depending on the July precipitation forecasts.
To summarize the supply situation for both crops, while the potential is still there for large crops, the production outlook seems to get smaller every time we look. Currently, USDA still has the corn crop projected to be around 15 billion bushels, but again that is before working in the drought impacts. Soybeans are projected at 4.4 billion bushels, which would not be a record crop, but it’s close. However, again the drought looms large, especially since much of the increase in planted area is in the drought areas. So supply concerns continue to support higher prices.
The same can be said as we switch to the usage/demand side of the markets. In spite of the higher prices we have seen throughout this year, crop users have continued to purchase existing supplies and make plans for the upcoming crops. The Grain Stocks report showed crop disappearance during March-May was strong as feed, fuel, and export demand continued to chew through existing supplies. Advance export sales for both corn and soybeans have easily exceeded the sales pace over the past few years. As we enter July, roughly 350 million bushels of soybeans and 600 million bushels of corn are already spoken for from the upcoming harvests by international buyers. Domestically, the most encouraging sign has come from the ethanol industry as corn usage for ethanol production has returned to pre-COVID levels. Prior to the economic slowdown due to the coronavirus, the US ethanol industry would process 105-110 million bushels of corn per week. This provided the corn market a relatively stable flow of usage over the course of a year. The COVID crisis temporarily cut that usage in half and the deep freeze the country experienced in the late winter took another bite out of the industry. However, as the COVID restrictions have lifted and travel has rebounded, the need for fuel has risen. More gasoline usage translates to more ethanol usage and more corn processing. And the data for June (Figure 4) show a return to pre-COVID levels for the ethanol industry.
The price swings over the past couple of months have been dramatic, but throughout the summer, prices have remained well above projected production costs. For May, June, and now, early July, prices have tended to spike high early in the month, then fall back as we move through the month. We will likely see that see-saw pattern continue as the drought impacts are brought into the market. Traders will also continue to look for signs of weakening demand under these higher prices. While the advance export sales have been strong and biofuels have rebounded, will those patterns hold up as we move into the fall?
Current futures suggest traders do expect usage to hold up and the drought to pull some bushels out of the national yield. December corn futures have bounced around the $5.75-6.00 range. November soybean futures are floating around $14 per bushel. These would be the best harvest-time prices since 2012. So traders continue to maintain weather premiums in the markets. But we should also expect that the trade will pull some of those premiums away when the weather forecast shows greater potential for precipitation in the Corn Belt.
Chad E. Hart, extension economist, 515-294-9911, firstname.lastname@example.org