We now have an official starting point for new crop supply and demand projections. While Friday’s USDA report held little in the way of market moving surprises, it did provide some great insight into what the economists at the USDA see happening in the global market structure now through August of next year.
US crop years run from September to September for most everything but wheat, that has a June to June marketing year. For traders the crop being planted now is considered new crop, with its official marketing year kick off September 1st. However, we start to analyze the new crop carryout outlook well before that. The USDA first provides a broad glimpse at their expectations for the year ahead in their February forum figures, then again with a more developed analysis in the numbers released Friday.
Old crop, or the crop that was harvested last fall, has had our focus for the last year, with its importance now fading slightly as we grow comfortable with just how much physical supply is available to meet demand needs.
While like I said, Friday’s report held little in the way of surprises, it did provide tremendous insight into what folks at the USDA are seeing when it comes to the economics in the market and the production outlook both here and abroad.
Looking at corn first, we saw old crop carryout increased 75 million bushels from last month’s estimate on reduced export pace. This took old crop carryout, also known as new crop beginning stocks up to 1.417 billion bushels, 51 million bushels higher than the average pre-report estimate. The most concerning part to me when it comes to old crop corn, is how far we continue to lag demand projections for ethanol and exports still, even after Friday’s cut.
Some in the industry feel the USDA is overstating old crop ethanol demand by 50-100 million bushels, with room to take that much out of old crop exports as well when looking at current pace. Feed demand will always remain in question, with the residual usage component of that sector keeping actual feed figures projected a bit murky.
New crop-wise, the USDA put 2023-24 ending stocks at 2.222 billion bushels. If realized, this would be one of the largest domestic corn carryouts seen over the last decade. For a lot of folks, it is very easy to shoot holes in the production figure, specifically the yield estimates, as 181.5 would be a new yield record by far. After the report we had an in-depth chat with Seth Meyer, Chief Economist at the USDA, where we asked him questions on their trendline projections.
Specifically, we wanted to know if the USDA used any type of weighted figures to get to the trendline yield, as the obvious expansion in ‘fringe’ acres has been thought to be the reason we haven’t met trend the last few years. Mr. Meyer explained they do use weighted analysis both in their February data using anticipated acreage breakdowns, then again in May using NASS acreage figures.
As mentioned, many traders and farmers have been quick to dismiss the USDA figures from Friday on account of the big year over year jump in yield. I myself feel more inclined to take the under, if we’re being honest. However, even if we were to trim 4.5 bushel per acre off yield projections to get to a far more attainable 177, that would only cut 378.5 million bushels off from production and take carryout down to 1.8 billion.
As in old crop though, what is most concerning to me isn’t the 181.5 that will likely end up trimmed, it’s the extra 755 million bushels of demand the USDA has found in the new crop year. With Brazil set to produce a 130 million metric ton crop, further increasing their export competitiveness well into the 2024 calendar year, it is difficult to think we even come close to meeting the export projection, without much lower offers out of the US or a major production issue elsewhere.
The soybean outlook came in relatively close to expectations as well, with the USDA increasing old crop carryout 5 million bushels on increased imports to 215 million bushels. New crop supply and demand showed an anticipated increase in domestic crush thanks to the many projects set to come online over the next year. This increase in domestic demand will help offset the small reduction in anticipated export demand, taking our carryout up to 335 million bushels for next year.
Like corn, this production outlook hinges on a near record yield with a target of 52 bushels per acre. Also like corn, the outlook struggles to anticipate just how much global demand could be offset by back to back record soybean crops out of Brazil. Next year’s Brazilian bean crop projection is an astounding 163 mmt or nearly 6 billion bushels, well above the US’ expected 4.5 billion bushels of production.
We will touch on this far more in-depth soon, but the idea Brazil will be the country with growing ending stocks as currently anticipated by the USDA makes little sense considering they have just over half the storage needs necessary to cover their crops.
In wheat, the outlook is as confusing as it can be, with each class having its own very different story. While the Chicago contract is Soft Red Winter Wheat specific, it is also very much the market that tends to reflect world fundamentals. Minneapolis wheat is the Spring Wheat market, with that crop going in the ground currently across much of the Northern Plains. Kansas City Wheat reflects the conditions and market structure of the crop in the Southern Plains.
This year weather across much of the Soft Red Wheat Belt has been decent, with an excellent fall last year aiding establishment and making for a solid crop outlook across much of the growing region. Hard Red Winter Wheat has not been so lucky, with an historic drought resulting in poor germination, and crop conditions that are some of the lowest on record.
The poor crop conditions have resulted in near record abandonment, with poor yields projected. When it comes to wheat, each class will trade its own story, with basis and spreads set to do much of the heavy lifting there. It is also very possible we could see the price spread between KC and Chicago wheat continue to widen as the fundamental situation in the two classes is very different. For many, how the spring wheat crop turns out both here and in Western Canada will influence direction more than most anything else.
It is interesting to note when I speak of wheat abandonment, for many in the region that had crop insurance that means they will take a full loss on their wheat crop, with many taking the gamble on planting uninsured sorghum or corn in the hopes the recent rains seen continue and they’re able to produce a crop.
Looking ahead, getting this outlook out of the way is helpful because it is no longer lurking in the market. We now have an idea of what we need when it comes to risk premiums, and what we will be watching when it comes to production and demand.
In other market moving news, I will be watching the results of today’s election in Turkey closely. Erdogan has been key in getting Russia to agree to the Black Sea Grain Initiative and helpful in keeping negotiations going. He and Putin have a deep history, with mutual respect. How a change in Turkish leadership could affect the region remains to be seen, but with the opposition’s close ties to the West, we could see an interesting reaction from Putin if they were to win.
We are seeing Ukraine prepare their much-anticipated spring counter-offensive as well, with Russia ramping up their aggressions as they lose hold over some of the more heavily contested regions in the East. The corridor agreement is set to expire in 4 days per Russian officials, with the result of today’s election likely having an influence. It is very possible neither candidate could take over 50% of the vote as well, with a potential run off in two weeks.
The USDA reduced their Ukrainian crop and export outlook for next year significantly though, likely showing the influence the war has on overall global price direction will continue to fall off as end users find themselves able to tap into additional suppliers.
Overall, we now know what the USDA expects in the year ahead, with each month providing potential to see changes. The next big update will come at the end of June with final planted acreage and quarterly stocks, until then we trade weather, war, outside market fundamentals and cash. As always, don’t hesitate to reach out with any questions! Have a great week.
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.
