We are now over halfway through the crop year for corn and soybeans and three quarters of the way through the wheat marketing year. As we talked about months ago, time is the only thing that provides answers to the questions we have at the start of the marketing year, especially when it comes to demand.
With this in mind, and the upcoming Planting Intentions and Quarterly Stocks update likely to be this week’s focus, I thought now would be a great time to give an update on old crop fundamentals and what that could mean for price as we head into the Northern Hemisphere growing season.
After what has felt like months of talk about poor corn exports, we are finally seeing the long awaited uptick in global demand for US products. Traders began to talk about the US being the cheapest, most reliable supplier for corn in December, expecting a sharp uptick in interest. However, the supply of Brazilian bushels combined with concern over global financial conditions provided a slow start to our export year.
The slow start and lack of interest—as well as a sharp cut in production expectations keeping domestic prices elevated--has pushed the USDA to cut export expectations by nearly 550 million bushels from August projections to March. Some traders will argue the market spends an inordinate amount of time debating corn exports as they are only 15% of the demand pie, but with relatively consistent domestic demand, corn exports become the driver in ending stock adjustments for the year, therefore are incredibly important to watch.
The USDA’s export update in their March report had exports down 621 million bushels from a year ago and looking at the sales differences to our top customers made it easy to see why. While Mexico’s purchases have remained relatively consistent year over year, sales to China at the start of the month were down 63% from last year, sitting at 4.5 mmt or 177 million bushels, versus the year prior total of 12.1 mmt or 476 million bushels. Sales to Japan were down 54%, 4 mmt or 157 million bushels lower as well.
Talk of reduced exports as well as worries over potential reductions in domestic demand with an anticipated recession and margins for feeding livestock pinched, combined with turmoil in the financial sector had speculators exit the corn market in a big way, dropping prices on the May contract nearly 80 cents from top to bottom in a matter of days. As they say though, low prices cure low prices, and the drop in value has helped to spur demand.
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China’s return to the US corn market has been welcomed in a big way, as they have managed to buy the most corn since May of 2021, purchasing just over 3 mmt or 118 million bushels in the last 3 weeks. Japan’s purchases have not gotten the attention China’s buys have, but they too have increased their buying pace significantly, adding 1.2 mmt during that same period of time.
This as well as a stronger than expected job market keeping gasoline demand higher than expected, has traders now anticipating the USDA will keep current projections for corn used for ethanol near this level as opposed to sharp cuts expected by some to start the calendar year.
All of this great news for what was viewed as an ailing market, helping to put a floor in place. At this point, the recent uptick in sales does not necessarily mean the USDA has to make big changes to demand projections coming up, barring a surprise from Quarterly Stocks next week, but it does mean a continuation of cuts to demand like we have seen recently should come to an end for the time being, stabilizing ending stock projections.
While the fundamental outlook for old crop corn has changed significantly with the return of China and Japan and a stabilizing ethanol production outlook, the situation in the soybean market appears to be moving in the opposite direction.
Soybeans have been the market that just would not go as gently into the good night as expected, not just this year, but for what feels like the last 3-4 years, as talk of big gains in domestic ending stocks got waylaid by upticks in demand, cuts to production or both these last several years.
Last year’s cuts to production in the US throughout the year combined with a slow start to the Brazilian bean export season has kept traders talking about the threat of sub 200 million bushel ending stocks for the last several weeks. As I discussed in my March 5th, 2023 article here on Barchart, the slow start to the Brazilian export season did not mean we would see a continuation of strong export demand from the US because their supplies would eventually make it into the global pipeline, possibly even working into the US in a big way.
The spread in prices between the US and Brazil has only grown since then, with Brazilian bean values losing 85 cents for May shipment since the start of March, moving the difference in price between the 2 countries to over $1.70/bushel. This spread has prompted at least 3 cargoes worth of beans to be traded into Eastern ports, while rumors of another 6 cargoes trading into the Gulf were present in the market Thursday and Friday. According to one well followed market analyst, upwards of 20 million bushels have been purchased for import in the last week or so, markedly changing the local supply and demand fundamentals in the regions where the beans will arrive.
In addition to talk of Brazilian beans arriving in the US we have around 1.5 mmt or 55 million bushels of beans committed to China but not yet shipped, with an additional 2 mmt (73 million bushels) of beans sold but not yet shipped to Unknown. While most like to assume Unknown is China when sales are announced, historical indications show that tends to be the case around half of the time, leaving an estimated 2.5 mmt of beans sold to China but not yet shipped.
With the economics so violently in favor of foregoing US purchases and bringing in Brazilian bushels, as well as rumors of crushers in China defaulting on much higher priced contracts, the worry is now rapidly hitting the market that we could not only outpace import expectations, but could fall short on demand projections, a situation we have not faced in soybeans in quite some time.
Of course, with the amount of open purchases unshipped in beans down significantly versus a year ago, some remain optimistic the bushels committed will ship, leaving us to watch export inspections closely in the weeks ahead.
This is an important exercise not only for beans, but for corn as well.
In other news, the fund sell off in wheat has left it wide open to a quick rush back into the market if we were to see any sort of supply scare develop. We got a big rally Friday on the back of Russian wheat export restriction rumors. At the end of the day though we discovered Russia has no intention of restricting exports, planning instead to work to keep a price floor under the market, trying to keep their farmers profitable.
Weather in many wheat producing areas remains suspect as well, with dry conditions in Europe, dry conditions in the Southern Plains, a variety of conditions in the Black Sea and feet of snow on the ground still in the Northern Plains as the calendar gets ready to turn to April. Wheat production is far from out of the woods, while cash values traded around the world and the depth of offers in tenders will remain key to watch in the weeks ahead.
Weather will be key when it comes to final acreage as a whole, with the market likely to excitedly trade acreage ideas this week ahead of the USDA’s Planting Intentions report. Trade expectations appear to put corn acres somewhere between 87.5 and 93 million acres, a range of nearly a billion bushels in subsequent production estimates using the USDA’s most recent trendline yield. The range of guesses for soybean acreage seems to fall between 86 and 90 million, a production range of around 200 million bushels using 50 bushel yields.
In the end, this week marks the unofficial kick off to the new crop supply and demand debate season in the face of changing old crop dynamics, meaning now’s the time we’re going to put the “fun” in fundamentals. I’ll have a summary of Friday’s USDA numbers next week and what they mean as we look ahead.
In the meantime, don’t hesitate to reach out if you have any questions!
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
