July 14, 2017
A short-term buying opportunity in US corn and soy markets?
Rainfall and a recent USDA report elicited a knee-jerk sell-off on the part of institutional investors. How arid weather and overestimated crop yields are creating a window for short-term grain trading profits.
By ERIC J. BROOKS
An eFeedLink Hot Topic
After rising on the driest growing conditions since 2012's historic drought, corn and soybeans have endured a sharp deflation to their price prospects. They were first pummeled by a USDA report which Having first endured a bearish (and surprisingly unrevised) USDA forecast and then news of unexpected rain on the great plains, it has been a rough week in both corn and soybean markets.
First, unexpectedly heavy rains in parts of America's Midwest poured water on drought concerns that had lifted corn 9% in two weeks, from US$3.57/bushel in late June to US3.89/bushel in the second week of July. Then, the USDA surprised the market by leaving its corn (170.7bushels/acre) and soy (48.0 bushels/acre) unchanged despite several previous weeks of escalating reports of drought-induced crop damage.
Instead, based on a 1.4% revision in planted acreage, it unexpectedly boosted its US corn harvest estimate from 357.27 million tonnes to 362.09 million tonnes. While nowhere near last year's record 384,8 million tonne crop, the larger harvest was not offset by a 1.27 million tonne revision in feed corn demand or export estimates, which remained unchanged.
As a result, instead of falling from a record 60.2 million tonnes in 2016-17 to 53.06 million in 2017-18, the USDA revised its ending inventory estimate to a nearly unchanged 59.06 million tonnes. Together with the surprisingly strong rainfall, it was enough to crash corn from US$3.89/bushel at the start of the trading week to US$3.69/bushel four days later.
A similar but more intense rise and fall was experienced by CBOT soybeans, which rose a steeper 14.5% over the same two weeks, from US$9.11/bushel in late June to US$10.43 two days before the USDA report. Enduring downward pressure from an unchanged USDA soy crop yield and harvest estimates, mid-July's rainfall induced a similar 5.4% price retreat to US$9.86/bushel.
While the market's short-term reaction to deflationary, supply-abundant USDA news is understandable, the question is 'do current prices accurately reflect emerging harvest time supply fundamentals?' While the world is hardly short of corn or soy, the USDA may indeed have erred on the side of too much optimism.
First, while the market's program trading saw institutional investors engage in automated, program trading driven sell-off, computer software is not consciously aware of ground-level crop growing conditions –and these tell quite a different story. While the rains moved the market, they did not touch all parts of America's corn belt.
According to the University of Nebraska-Lincoln Drought Monito, as of July 11 –just before recent rains commenced– the US corn and soy growing areas area with arid weather conditions across has increased –not decreased– over the past week. , there was a significant expansion of extreme drought conditions in Montana, North and South Dakota and of areas with moderate to severe drought conditions. Nebraska and Iowa also saw an expansion of crop growing areas suffering either moderate or severe drought conditions.
Given that many areas have seen such dry conditions since May, the rains came too late to prevent crop damage that is not reflected in the latest USDA report.
Second, recent rains are helpful but without additional significant precipitation, soil moisture cannot be restored back to normal levels in time for mid-to-late July's corn pollination window. The question is, 'will additional follow up rains arrive in time to prevent damage to this year's crops?' –and the answer appears to be 'no.'
Shortly after the above-mentioned rainfall occurred, Don Keeney, senior meteorologist with MDA Weather Services stated that, "A drier and much warmer pattern for southwestern [plains] areas will allow stress to quickly build again." He expects that the resumption of dry weather in Illinois, Iowa and Missouri will be accompanied by temperatures exceeding 35C. This would be more than sufficient to cause seriously impact corn's mid-summer pollination process in these major feed crop growing states.
Anticipating that such damage will only be captured in August's USDA report, MDA has forecasted US corn yield of 165.8bushels/acre, 2.9% less than the USDA's estimate. The soy yield is being forecasted by MDA at 46.5bushels/acre, 3.1% below the USDA's projection.
Such a reduction in crop yields would lead to US corn crop of 351.7 million tonnes and soy harvest of 112.3 million tonnes. –That would mean that instead of rising from 2016-17's 53.6 million tonnes to 59 million tonnes, corn inventories would probably close 2017-18 lower, at around 50 million tonnes.
That would mean that instead of falling from a record 227 million tonnes to 200.8 million tonnes, world corn inventories would close out at around 191 tonnes. The would put the world corn stocks-to-use ratio just under 18% for the first time since 2013, when the current market bear cycle began.
Given that the new market cycle has only begun, it will take one to three growing seasons before corn's stocks-to-use ratio falls the 15% level where rallies ignite aggressively or the 11% to 14% level, where they peak. –Even so, should MDA's dry July weather and lower crop yields materialize it could also push CBOT corn over US$4.00/bushel at harvest time.
Such a rally, while short, could be intense if current dry conditions in China bring that country's crop more than 5 million tonnes below expectations. Combined with the above mentioned drought damage to the US corn crop, it could bring the world corn stock-to-use ratio to below 17.5%. Firm prices due to dry weather in America and China would then endure through the harvest period and probably at least until the prospect of a good Latin American crop materializes.
Similarly, should soy yields fall as MDA predicts, it would lower the US soy crop harvest from its anticipated 115.9 million tonnes to 112.7 million tonnes. That would cause American soy inventories to fall more steeply. Instead of rising from 11.2 to 12.5 million tonnes, US soy stocks would close 2017-18 at approximately 9 million tonnes.
That would not impact the soy market as much as it does corn: Soy is closing 2016-17 with a world stocks-to-use ratio of 28.6%. A smaller soy harvest based on MDA's yield estimates would mean that instead of falling to 27%, the world soy stocks-to-use ratio would fall to 26%, which is about 3% higher than the level at which soy prices rally and 5% above where its market cycle peaks. Even so, it would succeed in firming up soy above its early July US$10.40/bushel peak.
In sum, the world continues to have plentiful supplies of corn and soy. This won't change over one mere northern hemisphere crop growing season. That nixes the prospect of a multi-year rally like the one seen earlier in our decade or in the late 2000s.
Even so, the USDA's apparent blunder in not cutting corn and soy yield appears to have triggered some computer-driven institutional selling off corn and soy futures. Barring an act of God that makes a second wave of torrential rain fall upon America's Midwest within the next week, current corn and soy price levels are an opportunity to cash in on a potential 10% to 20% return over the two months leading up to North America's harvest.
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