Summer 2023: the roller coaster
The agricultural markets and amusement parks have a lot in common. The action starts up in the late spring, there are a lot of wild rides throughout the summer, and once autumn arrives, we begin planning for next year. This summer (and especially the past couple of weeks), the amusement park is very fitting. Market bulls and bears have both found information to support their positions, and prices have fluctuated wildly. The pricing roller coaster is fully loaded and the line to get on is a mile long. The combination of the Acreage, Grain Stocks, and latest WASDE reports provided the fuel for significant market swings.
For corn, the end of June reports revealed more corn plantings and increased corn disappearance than traders expected. Compared to the March Planting Intentions report, the June Acreage report showed 2.1 million more acres for corn in 2023. Given USDA’s trendline yield, that potentially added roughly 350 million bushels to 2023 corn production, making a projected record crop even bigger. However, the June Grain Stocks report showed less 2022 corn in storage than expected, implying more corn usage, but the question was how that corn was used. The answer wasn’t provided until the July WASDE report.
The July WASDE report contained big adjustments for the balance sheet. The tighter 2022 stocks were explained by higher feed and residual use, up 150 million bushels from the June estimate. However, corn usage for ethanol and exports both were lowered, as ethanol dropped 25 million bushels and exports lost 75 million bushels. Net, 2022-23 ending stocks dropped 50 million bushels. No changes were made to the 2023 corn usage projections, but the shifts for 2022 could signal issues ahead for 2023. For the 2023 crop, USDA did move forward on adjusting yield, based on the weather and crop conditions seen thus far through the growing season.
The projected national average yield was lowered 4 bushels to 177.5 bushels per acre. Given the new June acreage number, this pulled nearly 300 million bushels out of the corn production estimate. Combining the acreage and yield shifts, the corn production estimate increased 55 million bushels. With beginning stocks down 50 million bushels, that means 2023-24 ending stocks basically stayed the same (up 5 million). So there were a lot of shifting numbers, but in the end, USDA was able to maintain their 2023-24 season-average price estimate at $4.80 per bushel.
The land that corn gained likely came from soybeans. The June Acreage report found 4 million fewer soybean acres than the March report. At USDA’s trendline yield, that lowered projected soybean production by 210 million bushels. The adjustments to the 2022 soybean crop were all focused on trade, with imports increased by 5 million bushels and exports lowered by 20 million. That increased 2022-23 ending stocks by 25 million bushels, so higher stocks, but still a very tight market.
The July WASDE provided no other adjustments to 2023 supplies, as USDA maintained their trendline yield for soybeans. But the outlook for soybean demand was another story. Domestic crush usage was decreased by 10 million bushels, based on expectations of slightly lower soybean meal use. The larger cut though is in exports, dropping 125 million bushels. If realized, that would be the third straight year of export declines. The projections for both soybean supplies and usage are shrinking, but thus far, the supplies are shrinking slightly faster and USDA lowered its 2023-24 ending stock estimate to 300 million bushels. Soybean stocks look to remain tight for a while, leading USDA to raise its 2023-24 season-average price estimate by 30 cents to $12.40 per bushel.
The two sets of numbers I have been and continue to focus on are USDA’s yield and export estimates. As we discussed last month, advance export sales for both corn and soybeans have been weaker than average.But the main focus of traders for the next few weeks will be in formulating their yield projections. As USDA’s corn yield move highlighted, crop conditions have not been ideal for much of the country. But recently, there has been some improvement. Figures 1 and 2 show the percentages of the national crops rated "Good to Excellent" in USDA’s weekly Crop Progress reports. The dark blue region in each graph shows the range in that percentage since 1986. The light blue line is the weekly rating for the 2022 crop and the black line is the five-year average rating. The red line displays the ratings for the 2023 crop. Week 27 is the week of July 2-9. As Figure 1 shows, the 2023 corn crop has been rated below both last year’s crop and the five-year average. But over the past couple of weeks, the 2023 ratings have been increasing and the gaps are getting smaller.
When the current year’s rating is below (above) the five-year average, the national yield tends to be below (above) trendline. In the past, I have used these ratings to create a rough estimate of the final national yield, based on a regression using this percentage and a simple time trend. That simple model lines up fairly well with USDA’s current yield estimate. The model indicates 178 bushels per acre and USDA moved to 177.5 bushels per acre. Based on historical performance, the model makes its best projection given the "Good to Excellent" rating in week 29, roughly lining up with the week after most of the nation’s corn has pollinated. So it will be interesting to see if corn conditions continue to improve and what that might mean for yields this fall.
Figure 2 displays the same data for soybeans. The recent improvement in the crop rating is not as strong for soybeans, but the general relationship is the same. Above (below) average ratings tend to lead to above (below) average yields. Unlike in corn, USDA did not update their yield estimate, based on the crop’s condition. While the rating signals the potential for below-trend soybean yields, the relationship is not as well defined as it is for corn. The predictive power of the soybean ratings is not as strong and it slowly builds throughout the growing season. Weather conditions later in the growing season seem to have a stronger impact on soybean yields, relative to corn.
Market bulls have latched on to drought/yield concerns for both crops and the tight soybean stocks. Market bears concentrated on the improving crop ratings and the disappointing advance export sales. Over the past month, Dec. 2023 corn futures have swung from $6.30 per bushel to $4.80. Nov. 2023 soybeans have jumped from $12.25 per bushel to $13.92. That price volatility will remain in the markets until the yield and export uncertainty clears, likely all the way to harvest. While this volatility can be maddening, it’s not necessarily bad. Like a roller coaster, we can enjoy the thrill at the top and feel our stomach in our throat on the downswings. But at least with the markets thus far, those downswings have brought prices just down to production cost levels and not far below them. So while 2023 is a turbulent year, it still has the potential to be a profitable one as well.
Listen to the latest Market Outlook video for further insight on outlook for this month.
Chad E. Hart, extension economist, 515-294-9911, firstname.lastname@example.org