Corn and soybean futures have continued to gain value into the new year. Both commodities are well supported by both strong demand and lower supply than anticipated.
The most recent Jan. 12 U.S. Department of Agriculture report had plenty of surprises that will likely keep prices firm for the coming months.
Lower than expected supply
Starting with corn futures, the Jan. 12 report had a few bullish surprises where supply is concerned. The aftermath of the Derecho storm and extreme heat of August took a toll on U.S. yields. On the January report, 2020-21 corn yield fell from 175.8 bushels per acre to 172 bushels per acre. This yield reduction led to an overall production loss of 325 million bushels.
Perhaps the biggest bullish surprise was the fact that the USDA revised its Sept. 1 stocks estimate lower by 76 million bushels, (this would represent the 2019-2020 ending stocks). On paper the USDA showed this truth as an increase to the 2019 feed and residual category, increasing demand to 5.9 billion bushels.
That Sept. 1 stocks number is now 1.919 billion bushels, which then also becomes the number pegged as old crop carry-in for the 2020-21 marketing year. This lower carry-in number was not expected, and is validation for many who argued that the 2019 crop had low test weight, therefore more of it needed to be used in feed to achieve the normal weight gain in livestock.
Because of the lower 2020 production, and the lower than expected September quarterly stocks data, the Dec. 1 quarterly stocks number came in at 11.322 billion bushels, well below trade estimates. This is actually record disappearance for this category. Lower corn supplies from the U.S. is officially on the books.
Looking at soybeans, this market also found continued friendly news as the USDA lowered yield for the 2020-21 crop from 50.7 bushels per acre, to 50.2 bpa. This lowered supply by nearly 40 million bushels. The lower crop reflective of the extreme August heat.
Demand looks strong for corn and soybeans
Looking at soybeans, export demand continues to be strong. The USDA pegged soybean exports at 2.23 billion bushels, with the soybean crush pegged at 2.2 billion bushels. Exports sales and export inspections continue to dominate headlines. For the week of Jan. 14, U.S. export inspections (beans that have left the country on a boat) are at 70% of the USDA goal. So that means of the 2.23 billion bushels that the USDA has pegged for soybean exports, 1.561 billion bushels have already left American ports for other nations. Ending stocks for soybeans are at a mere 140 million bushels, and are expecting to continue to shrink lower into summer.
On the January report the USDA actually lowered the 2020-21 corn demand for three key categories. The feed/residual category by 50 million bushels to 5.65 billion bushels. Export demand was reduced by 100 million bushels. Corn for ethanol demand on the January report was lowered by 100 million bushels to 4.95 billion bushels. The fact that the USDA already lowered demand for these three categories tells me that they think corn prices will be going higher in the coming months, therefore they are reducing demand now. This reduction for demand seems pre-mature, and feels a few months too early.
Had the USDA not reduced demand for these three categories, the ending stocks number for corn would have been closer to 1.3 billion bushels, which may have sent corn futures limit up for more than one day, providing substantial price support to both old crop and new crop prices.
But as it is, ending stocks are for the 2020-21 corn crop are pegged at 1.552 billion bushels; sliced in half from industry expectations back in July of 2020.
The stocks to use ratio
The stocks to use ratio for 2020-21 soybeans is at 3.1%. This is the second tightest stocks to use ratio in American history, and absolutely justifies old crop soybean futures to trade in the $13 to $14 price point levels.
The current stocks to use ratio for corn is at 10.6%. Looking back at the past 26 years, only seven years have seen a tighter final stocks to use ratio than what we have now, in late January, with over seven months of the grain marketing year to go.
The years were the stocks to use ratio was tighter were: 1995-96, 1996-97, 2003-04, 2010-11, 2011-12, 2012-13, and 2013-14. If you remember, in the mid-1990s, that was the first time the futures market saw $5 corn. And in the early 2010s, that was the first time the industry consistently saw $6 to $8 corn futures. Corn prices will likely hold firm due to the low ending stocks.
In February, the USDA will hold its Outlook Forum where the first planted acreage guesstimates for both corn and soybeans to be planted this spring in the United States will be announced. The industry is already expecting an increase in corn and soybean acres. But once we hear their official guesstimate the industry will used that number to pencil in different supply/demand scenarios that could unfold into summer and fall. Price will likely waiver, correct, trade sideways, possibly have a seasonal price correction lower in March and April.
Due to the reality that U.S. corn and soybean supplies are historically “low,” grain markets will be well supported going into spring. And make no mistake about it, the world cannot afford for the U.S. to suffer any weather issues this spring or summer.
Editor’s note: Naomi Blohm is a marketing advisor with Total Farm Marketing by Stewart-Marketing and she is a regular contributor to the Iowa PBS series “Market to Market.” She can be reached at [email protected].
