Old Crop Abundance vs. New Crop Weather vs. Fund Short Positions: A more complex market lies ahead, as the trade reconciles record – and still rising – old crop corn, wheat and soybean inventories, a developing drought across the US Plains and ongoing sizeable short positions held by speculators. Decent short covering was seen this week, but overall recent buying has barely affecting funds’ net position overall. As of Tuesday, funds were short a net 340,000 contracts in corn, wheat and soy combined. Since Tuesday, ARC estimates that funds have bought covered another 75-80,000 contracts, but this still leaves managed funds with the shortest position in early June since the data series began in 2016. The USDA again raised old crop global corn, wheat and soy stocks to new record levels, but since markets trade on the margin, any measureable downside risk will be a function of improving Central US weather – and recent model releases have trended warmer across the US through the latter part of June.
Soybeans:
The June updates to the USDA’s balance sheet estimates were fairly benign. The only real surprise was that they did not raise the old crop export forecast, with current commitments at a record large 105% of their forecast, and still building. Ahead of the WASDE report, the FAS reported another old crop soybean sale worth 201,000 MTs, to an unknown destination.
The only adjustment to the old crop balance sheet was a lower crush figure, which was reduced by another 15 Mil Bu to 1,910, which added 15 Mil Bu to the old crop carry out. No other changes were made to the old crop balance sheet, but we expect that the old crop export forecast will increase in upcoming reports. In the new crop estimates, the USDA maintained the area and 48 BPA yield. The only change made was to the larger carry in figure, which lifted the stocks projection for next year to 495 Mil Bu.
In the soy product estimates, both meal and oil production forecasts were lowered by the smaller crush forecast. With 450,000 fewer tons of soymeal, domestic use was cut by 350,000 tons with the other 100,000 tons taken off of the export forecast. In the soyoil estimates, the production forecast was lowered by 175 Mil Lbs, though there were no changes to either the import or export forecasts. 100 Mil Lbs was still taken off of domestic consumption and stocks were lowered by 75 Mil Lbs to 1,987 million. While domestic consumption was projected lower, the estimate for biodiesel demand was unchanged at 6,200 Mil Lbs. The chart shows the difference between the USDA’s June biodiesel use forecast and actual use. In 2011/12 there was not an estimate, and in 6 out of the other 8 years the June estimate was too low. In the last 4 years, the June estimate has been withing 200 Mil Lbs of actual demand. Biodiesel imports continue to make headlines, and decision from the Commerce Department is expected ahead of August 21, but we expect that annual biodiesel demand will be close to the 6,200 Mil Lb forecast.
Corn:
The USDA’s old and new crop corn balance sheets were left completely untouched, which is not overly surprising. There’s evidence available to lift ethanol use another 25 Mil Bu, and ARC expect final US corn exports to be 25 Mil Bu above the USDA’s current forecast amid sales and shipments to date. Otherwise, it’s all weather moving forward, but we do caution that without much better rainfall across the western third of the Corn Belt, the USDA’s yield looks to high, and the market already is pondering what the balance sheet looks like using a national yield of 165-167 Bu/Acre. Crop conditions correlate poorly with yield in June, but this relationship improves thereafter, and close attention will be paid to developing dryness. Note further that despite model disagreement in the East, little/no precip is forecast across the Central Plains through late June.
Still, rallies like those in 2010-2012 are unlikely amid more than ample old crop US and world supplies. Old crop global corn stocks were raised for a fourth consecutive month to 224.6 MMTs, mostly due to higher Southern Hemisphere production estimates, including South Africa. Combined Brazilian, Argentine & S African corn production was lifted 2.1 MMTs. Major exporters’ stock/use was raised slightly to 13.7%, vs. 13.6% in May, and this will to some extent weigh on rallies in the near term. Argentine basis has fallen on this week’s rally in futures price. However, longer term direction will hinge upon movement in new crop exporter stocks/use, and weather will take priority over much else over the next 30 days. No further sales are advised currently, and today’s higher settlement is noteworthy.
Wheat:
The USDA made some very modest adjustments to its US wheat balance sheet. Old crop stocks were raised 2 Mil on higher imports. New crop imports were raised 5 Mil. Winter wheat production as raised 4 Mil as the HRW crop in W KS and CO has recovered better than expected from early May’s freezing temperatures and heavy snowfall. US wheat demand was left alone, and the trade is well aware that HRS yield will be first assessed in July’s production report. The 2017/18 season’s average cash priced was raised from $4.25 to $4.30, as already the USDA recognizes higher protein wheat will command a decent premium. AgResource is in general agreement with the USDA’s June balance sheet, but we note that production remains rather fluid as the spring wheat crop develops, and as conditions look to drop further in the Monday’s Progress report.
And we have started adjusting the crop lower. For now, total US wheat production is estimated at 1,765 Mil Bu, down roughly 60 Mil from NASS’s latest estimate. Winter wheat harvest is in its early stage, and yields have been widely mixed, and we maintain that there’s a bit more downside risk than upside in terms of production in CO, KS, NE and SD. The USDA’s all-wheat total of 1,824 Mil implies an HRS crop of roughly 440 Mil, which in turn implies an HRS yield of 43.0 Bu/Acre. Should drought intensify, our work suggests HRS yield will be closer to 38-39 Bu/Acre, and this US all wheat production will rest at 1,750 Mil – or 380 Mil short of total consumption. The market’s real excitement will begin once WASDE released its by-class balance sheets in next month’s report.
Like corn, there’s no shortage of spot wheat supplies, and in fact 16/17 global inventories continue to grow. The USDA raised old crop world wheat stocks to 256.4 MMTs, vs. 255.4 in May. Major exporters’ stocks/use in 2016/17 was lifted slightly from 30.3% to 30.7%. New crop major exporters’ stocks/use was raised from 25.7% to 26.7%, and so the June WASDE does lean a bit bearish wheat prices. Russian production was raised 2 MMTs, and barring a summer drought Russia will again have a massive exportable surplus. Major EU crop threats are lacking, and so any potential rationing in th US will be made a bit easier via exports from other countries. But on the margin, major exporters stocks will be in retreat, which along with US drought concerns will underpin the market on breaks. A lasting bottom in wheat was scored in 2016.