Rain, grain and prices
A change in the weather patterns can bring drastic changes for the crop markets. Extreme weather conditions tend to bring extremely high prices. More normal weather patterns tend to lead to lower prices on the board. We’ve seen these weather driven swings in prices over the past month as the Jet Stream finally moved to allow Gulf moisture to make it into Iowa. The flow of moisture has improved drought conditions across the state and has led to traders planning on the potential for larger crops this fall. The old saying “Rain makes grain” has knocked some bullish sentiment out of the markets.
Figure 1 shows the Iowa drought situation at the beginning of May. Roughly 75% of the state was considered abnormally dry, with northwest Iowa having a sizable chunk of land with severe drought. Within the 1st week of May, the dry area expanded to almost 79% of the state. Since then, however, a combination of Gulf moisture and a series of weather fronts from the northwest have provided some needed rains for Iowa crops.
While the rains have not significantly impacted the driest parts of the state, the abnormally dry areas are retreating. As of the last drought monitor in May (Figure 2), only 62% of Iowa was covered by some category on the drought monitor. The northwest Iowa patch of severe drought is still in place, but the storm patterns have begun to provide more precipitation even there. National drought conditions have been improving as well, especially for areas in the eastern Corn Belt.
The influx of moisture has renewed thoughts about large crop supplies this fall. USDA’s current estimates utilize their weather-adjusted trendline yields. Given the acreage from the March Prospective Plantings report, USDA estimates corn production at 14.99 billion bushels and soybean production at 4.4 billion bushels. At those levels, the corn crop would be the largest on record and the soybean crop would be the 3rd largest. At this early stage in the growing season, USDA had not incorporated any impacts from the drought conditions, but the markets were. Part of the early May spike in prices can be attributed to a strong weather premium being bid into the markets, reflecting the drought conditions. The rains move into the Corn Belt and that weather premium gets cut. As the abnormally dry areas shrink, so have price levels.
While prices have retreated, they are still historically high as the drought is only part of the market story. Crop usage has been very strong over the past twelve months and that strength is continuing to support crop prices. While the COVID crisis had a dramatic impact on many areas of the general economy, the crop markets were one of the first areas to rebound and recover. While feed rations shifted to accommodate packing plant shutdowns and slowdowns, feed usage remained robust. Corn grind for ethanol dropped quickly as ethanol plants temporarily shuttered last spring, but production bounced back to 90% of the pre-pandemic level within a couple of months. However, the biggest story on the demand side has been exports. As the virus was working its way around the globe, international demand for corn and soybeans was surging. That surge has led to record export sales for both the 2020 corn and soybean crops.
As prices strengthened this spring, there has been concern that the higher prices would blunt international demand. Normally, export demand is highly sensitive to price levels. As USDA constructed their projections for the 2021 crops, they factored in reductions in export levels, given higher prices here in the US and increased production across the globe. However, early data is suggesting a strong start for crop demands for the 2021 crops. Figure 3 displays the advance export sales for corn. While those advance sales had trended along with the pace from the past couple of years through April, the pace of sales in May greatly exceeded recent history. So while market prices were reaching highs we hadn’t seen in nearly a decade, export sales were moving briskly. As the numbers stand at the end of May, we have already sold nearly 25% of USDA’s export projection and the crop has barely emerged.
The bulk of this export surge has originated from China. With the combined impacts of the Phase One trade deal, the rebuilding of the Chinese hog herd from the effects of African Swine Fever, and the recovery of the Chinese economy as they emerge from COVID; Chinese crop demand has swelled to near-record levels. In the corn market, China transformed from a very limited purchaser of US corn to our largest trade partner this past year. For the 2020 corn crop, China bought 34% of the US’s exports. For 2021, China has purchased 73% of the advance sales. That is over 400 million bushels of corn. While other countries, such as Mexico and Japan, have also been active, China dominates this storyline. That also means the corn market will be especially sensitive to rumblings about commodity price inflation coming out of China. Over the past couple of weeks, the Chinese government has released several statements concerned about higher commodity prices. So there are reasons to wonder if the Chinese surge in purchases may slow in the coming months.
China has also made some early moves in the soybean market. The increase in purchases came at the beginning of the calendar year. China is explicitly responsible for 42% of these advance sales and is likely linked to much more, as sales to unknown destinations account for 37% of the advance sales. While the total amount of the crop accounted for is not quite as large as it is for corn, the advance sales are roughly 15% of USDA’s projection for 2021/22 exports.
The combination of the weather concerns and export sales have provided a significant platform for higher crop prices over the past several months, reaching a crescendo in early May. While the rains caused both the corn and soybean markets to back off later in the month, projected crop prices remain at very healthy levels. The markets are ready to build back in additional weather premium if conditions warrant (example: the June 1 price reaction to frost concerns over the Memorial Day weekend).
Despite the twists and turns of the past month, crop prices for harvest remain robust. Corn bids in central Iowa are well above $5 per bushel for harvest delivery. Soybean harvest bids are north of $13 per bushel. Demand signals have held strong in the face of higher prices, providing longer-term support for both crops beyond harvest. But it will be the weather forecast that sets the price table over the next couple of months.
Chad E. Hart, extension economist, 515-294-9911, email@example.com