It has been a minute since I have had time to organize my thoughts well enough to write this column. As I have mentioned numerous times before, my day job is working closely with growers helping them do all the things it takes to turn their bushels into cash.
To say the last couple of weeks have been rough would be putting it mildly. Farmers, optimistic through the roughest of storms over my last 20 years, are as downtrodden as I can remember. Margins are depressed, with losses from last year looking as though they are going to have to be rolled into even bigger losses for next.
There are bright spots of course, where the weather hasn’t been punitive, with yield looking like it could come to the aid of a grower’s bottom line—though increased costs from additional fungicide applications and the other extra inputs that come with wet years are quickly eating away at those gains. The situation doesn’t improve the further out a grower looks as input costs remain elevated, limiting opportunities for profit looking out into the 2025/2026 crop year even.
I am not telling anyone this for sympathy, as we are all grownups, doing grown up business things, but I feel it is important to understand what is happening in the countryside from the farmers perspective and how I feel it could impact the markets going forward.
Acreage and Stocks and Poor Reporting
It’s hard to believe it has been over two weeks since the USDA released their Quarterly Stocks and Acreage update. I have had a lot of thoughts about the numbers and have spent a decent amount of time digging into them to a certain extent.
First and foremost, I don’t think enough conversations are happening about response rates and what that means when it comes to the useability of the data. According to Lance Honig, Director of the Methodology Division and Chair of the Agricultural Statistics Board for NASS, the June report response rate was 40.1%.
This would be the one of the lowest response rates I have heard for a June stocks and acreage figure, falling below the 60%+ response rates that were common less than 10 years ago, and coming shockingly below the 80-85% response rates USDA officials say we saw in the 90s. A response rate of 40% is abysmal, with responses limited enough the USDA couldn’t disclose stock figures from some of the biggest corn producing counties in Iowa in order to avoid sharing information about individual operations.
In addition to the response rate, I spoke to Lance about how NASS uses the data provided by farmers and commercials to produce the quarterly stocks figures. Commercials are well represented in the survey with a fantastic response rate. Their willingness to respond combined with the USDA’s knowledge about the makeup of the commercial grain industry, makes those figures relatively easy to compile.
When it comes to the on-farm bushels, that’s where things get tricky, but basically the USDA takes the data provided, fine tunes it based on historical tendencies and statistical analysis to produce a range of where farmer stocks *should* be. They then take that range, using the balance sheet as a guide to where the final published on-farm figure should fall. To hopefully make it a bit clearer, they have an idea farmers have anywhere between x and y bushels on the farm based on the survey response, ending stocks help guide where between x and y we land.
I want to explain this because I feel it provides great insight into some of the major swings in quarterly stocks we have seen over the years. It is not a secret the USDA overestimated crop size in a big way in the 2019 production season, only to discover that miss the following summer when stocks weren’t there the way they should have been based on production estimates. This led to several memorable cuts to stocks in subsequent reports, fueling a run in price driven by increased demand and the inflation trade.
I am not saying we’re setting ourselves up for a similar run in price or major miss on stocks, what I am saying, is that when it comes to quarterly stocks, we can use the USDA figure as a guide, with cash as the better indicator of whether we are higher or lower than the most recent USDA figures. In addition, and this is a message directed more to farmers than anyone else, we cannot complain about major misses or bad data when we refuse to provide insight.
What Cash Is Saying
While traders like to say there is no demand, the cash market is saying there are not enough bushels moving to satisfy the pipeline in the nearby timeframe. Whether we are looking at interior values in the US, Argentina, Ukraine or Brazil, cash corn values have strengthened with the recent drop in futures. While some will argue the falling futures and stubborn farmers are driving the strength in cash, I can’t help but feel we may not have the extent of bushels on hand we think we may. Even here in Michigan, where Bird Flu decimated our commercial poultry flocks, we are seeing some unexpected strength in basis, both for corn and beans. Elsewhere, there are a few areas where farmers say grain is moving with ease, like Ohio and parts of Indiana, but for the most part originators across the country keep waiting for a rush of off farm grain that just doesn’t seem to come.
Basis continues to strengthen in Brazil, where exporters will likely look to move the ownership they have, but then get to choose whether they want to participate in the global market, looking at negative margins to do so. A heatwave and drought in Ukraine has the state meteorologist there warning 20-30% of production could be lost in the southern and eastern parts of the country, with others in neighboring countries unsure of their production outlook as well. In Argentina, the continued demise of the country’s currency has pushed the farmer to hold again, waiting/hoping for some type of incentive to sell in the form of an alternative currency conversion rate. Between slow farmer selling, logistical issues and the continued threat of strikes, their offers into the world market have been rising as well, even as the country works to wrap up corn harvest.
This not even mentioning the parts of China that had to deal with drought from the end of May into June that are now dealing with heavy rain and flooding.
The risk of tighter world supplies of corn is real, with the USDA recognizing that, ignoring much of what was presented in the stocks data, choosing to focus instead on disappearance, and raising feed and residual demand in the last supply and demand update, while also bumping up exports for both old and new crop.
While I am not here to say we should be entering a bull market, I will say we may be overdoing it to the downside, especially if demand continues to grow at the pace currently seen.
As I work to wrap up this week’s column, I leave you with one thought on the strength we’re seeing in cash and what the quarterly stocks report said. While I understand we have to trade the USDA numbers provided, one must wonder what would make more sense when explaining cash strength: a. the bushels aren’t quite there as expected or b. the stubborn farmer has built so much bin space and has so much free cash he/she doesn't have to worry about selling grain, working to fundamentally change the signals basis and spreads provide the market. I know which one I lean towards.
As always, let me know if you have any questions! Have a great day.
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.
