Closing Comments: 5/13/2020

After rallying to 4-week highs following Tuesday’s USDA supply-demand report that forecast better usage & lower stocks than the trade had expected, corn gave back those gains on Wednesday. Post-report corn prices have been restrained by USDA’s forecast for record-high new-crop yields & production, but demand remains the major stumbling block. Following cautious statements by Federal Reserve Chairman Jerome Powell on Wednesday morning that warned of potentially longer-lasting economic weakness, soybeans & wheat followed Tuesday’s modest post-report losses with double-digit swoons on Wednesday. Powell’s demand warning left traders worried that USDA’s reduced usage forecasts for old-crop would bleed into 2020/21, too. Wheat eroded in continued reaction to USDA’s forecast for lower old-crop exports, smaller new-crop wheat demand, & larger than expected new-crop US & global ending stocks. While initial price response to Tuesday’s data was subdued, Wednesday’s downward reactions were amplified.  On Tuesday, July corn futures gained 3.75c, Dec. corn rose 1c, July beans declined 3c, Nov. beans lost 1.5c, July soymeal rallied $1.80/ton, July soyoil dropped 0.23c/lb., & July & Dec. soft red winter wheat were each 2.75c lower.  On Wednesday’s close, July corn futures declined 4c, Dec. corn lost 3.25c, July beans tumbled 12.5c, Nov. beans dropped 11.5c, July soymeal eased $1.50/ton, July soyoil was 0.35c/lb. lower, July SRW wheat plunged 12.75c, & Dec. SRW wheat was 11.75c lower.
 
As US equity markets sagged 2% lower for a second straight day & energy markets came under renewed pressure, grain & livestock futures were under pressure, too.  Not all the news was negative.  Wednesday’s EIA Weekly Petroleum Status report for the week ended May 8 indicated that US producers cut daily crude oil output by another 300,000 barrels per day to 11.6 mil.brl(MB)/day—the lowest since mid-Dec. 2018. But commercially-owned crude oil inventory slipped only .745 MB to 531.476 MB—about 11% above the 5-year average for this time of year.  Because of a rise in Strategic Petroleum Reserve stockpiles, total US crude oil stocks still rose 1.188 MB last week. Gasoline inventory declined 3.513 MB to 252.894 MB, but were about 9% above the 2015-2019 seasonal average. Distillate supplies rose an offsetting 3.511 MB to 115.001 MB, about 16% above the 5-year early May average. Total commercially owned petroleum stockpiles edged only .544 MB below the previous week’s record high total.  The nation’s refineries sliced their operating rate to just 67.9%, down 0.6% for the week & 22.6% below last year. 
 
Compared to the oil reports, ethanol data was much more friendly. Ethanol facilities boosted ethanol output by 5.586 mil.gal. (+3.18%) to a 5-week-high 181.398 mil.gal.  That was still 41.29% below last year’s results.  For the sixth straight week, same-week ethanol production was the lowest since the EIA ethanol data series began in 2010.  For the third straight week, ethanol usage exceeded output last week. Weekly ethanol supplies declined 59.724 mil. gal. to 1,015.980 mil.gal.—the least in 7 weeks.  Ethanol output likely bottomed as stockpiles peaked in mid-April & processing margins have been improving ever since.  While the EIA data helped June ethanol futures to rise 1.2c/gal. on Wednesday, corn futures couldn’t overcome double-digit losses in soybeans & wheat. 
 
In export news, USDA announced on Wednesday morning that 7.275 mb of 2019/20 & 7.275 mb of 2020/21 US soybeans were sold to China.  On Tuesday, the farm agency reported that 4.997 mb of 2019/20 US soybeans were sold to China. Taken together, the purchases confirm half of the up to 20 cargoes of soybeans that China was rumored to be seeking on Monday for July-November shipment.  Grain merchants reported on Wednesday that South Korean feed mills had bought 2.462 mb of optional-origin feed wheat, & were also seeking 1.811 mb of corn & 20,000 mt of soymeal from South America.  Algeria bought 22.046 mb of milling wheat at an aggressively low price, & also tendered for 1.575 mb of optional-origin corn on Wednesday.  Tunisia will seek 2.462 mb of optional-origin milling wheat on Thursday, & Japan will tender for 2.939 mb of milling wheat next week.  Ukraine’s Ministry for Development of Economy, Trade and Agriculture reported on Wednesday that nation’s total grain exports have reached a record 52 mmt since July 1, 2019, up 19% year-on-year.  The agency has previously forecast that export could reach 55 mmt before the June 30 end to its 2019/20 marketing year.  Exports have thus far included 19.3 mmt of wheat, 27.2 mmt of corn & 4.7 mmt of barley.
 
USDA’S May WASDE report is its most influential report until the end-June Planting report.  Here's our detailed take on Tuesday’s data.
 
USDA lowered 2019/20 US corn production by 29 mb to reflect additional harvest losses in the northern Corn Belt & noted further losses could be reported in June when North Dakota farmers are resurveyed.  Old-crop corn exports were boosted 50 mb to 1,775 mb & feed/residual use was increased 25 mb despite recent woes in the livestock industry. That’s probably a reflection that the corn crop was lighter test weight & required more volume to get the same nutrition. Those increases were more than offset by a 10 mb decline in food use & 100 mb drop in crush demand for fuel ethanol. Aug. 31, 2020 ending stocks were increased just 6 mb, 127 mb below what the average trade guess expected.  In its first official new-crop supply-demand forecast of the season, USDA made some bold predictions. It multiplied its record-high Ag Forum corn trendline yield forecast of 178.5 bu/ac. by the March 1 prospective corn planting of 96.99 mil.ac. & the second-highest harvest percentage in history (92.4% vs. 92.5% in 2007/08 & the 10-year average of 91.5%) to forecast 2020/21 corn production at 15,995 mb—847 mb larger than ever before. While those assumptions are arguable open to considerable debate, USDA was also aggressive in its usage forecasts.  Feed usage was forecast to increase 350 mb year-on-year to 6,050 mb, second only to 205/06’s 6,153 mb as the highest ever.  Ethanol crush was projected to rebound 250 mb from this year to 5,200 mb.  Exports were predicted to jump 375 mb from this year to 2,150 mb.  With output up 2,332 mb from this year & usage up 970 mb, USDA projected Aug. 31, 2021 ending stocks would surge 1,220 mb higher to 3,318 mb. If realized, that would be the largest since 1987/88’s 4,259 mb & the fifth largest bushel carryover in history.  The forecast 22.4% stock-to-use ratio would be the largest since 1992/93’s 24.9%, but far below the 66.1% record set in 1986/87 at the depths of mid-1980s farm depression.  USDA left its old-crop average farm gate price forecast at $3.60/bu., but lowered its new-crop corn price to $3.20/bu.—the lowest since 2006/07’s $3.04/bu. average.
 
In its global feed grain outlook, USDA left its 2019/20 corn production forecasts for Brazil (101 mmt) & Argentina (50 mmt) unchanged, disappointing analysts that had on average expected 1.8 mmt & 0.5 mmt reductions for those nations, respectively.  Worse, global 2019/20 coarse grain output was boosted by 2.31 mmt, domestic feed usage was slashed 10.13 mmt & total feed grain end stocks surged 12.45 mmt to 345.88 mmt.  With the US providing 80% of the expected increase, USDA forecast global feed output would expand 75.36 mmt in 2020/21 to a record 1,481.44 mmt, usage would rise 45.55 mmt to a record 1,453.88 mmt, & coarse grain ending stocks would balloon 27.56 mmt to 373.44 mmt, second only to 2016/17’s 385.81 mmt as the largest ever.  Because the US is projected to produce about 28% of the global feed grain crop, final US yields & harvested acreage are key to whether global stockpiles surge. A 1% decline in US corn acreage, a 1% cut in harvested acreage & 5 bu/ac. reduction in US yield would cut US corn output by 710 mb.  A return to 2018/19 fuel demand would generate an additional 425 mb in demand.  Taken together, supplies would not look so large under those circumstances.  Most everyone believes that corn can’t rally much unless weather hurts production potential.
 
USDA played Jekyll & Hyde with its soybean supply-demand projections on Tuesday. More or less acknowledging that China will not be the summer savior for soybean exports, USDA slashed old-crop bean exports by 100 mb to 1,675 mb—the least since 2013/14’s 1,638 mb.  A 1 mb downward adjustment for northern Corn Belt harvest losses was offset by smaller residual use, pushing Aug. 31, 2020 soybean ending stocks to 580 mb.  While down 329 mb from last year, old-crop bean stocks would still be the second-largest ever & well above the average pre-report analyst guess for a 501 mb carryover.  USDA lowered its old-crop average farm gate soybean price by 15c to $8.50/bu., virtually equal to last year’s 12-year-low $8.48.   Using its Ag Forum trendline yield forecast of 49.8 bu/ac., March 1 prospective planting of 83.51 mil.ac. & 99.2% harvest rate (10-year average is 98.8%), USDA projected 2020/21 US soybean output at 4,125 mb, up 568 mb from last year & 5 mb above the average pre-report guess.  Optimism about the Phase One trade deal with China led USDA to boost new-crop bean exports by 375 mb to 2,050 mb & lift crush by 5 mb to 2,130 mb compared to this year.  Aug. 31, 2020 soybean carryover was forecast to decline to 405 mb.  Soybean prices struggled as traders were inclined to believe soybean acreage was more likely to rise than fall & that bean yields could return to the 50.55-51.95 bu/ac. of 2018 & 2016, respectively, if corn yields are record-high.  The same attitude made them skeptical of USDA’s forecast that 2020/21 global bean stockpiles would ebb 1.88 mmt lower to a 4-year-low 98.39 mmt. For now, the trade sees USDA’s estimate for new-crop farm gate soybean prices at just $8.20/bu.—the lowest since 20069/07’s $6.43/bu.—as a reasonable target. If USDA’s forecasts are correct, US grain farmers will again depend on government payments for a huge percentage of their net income.
 
USDA’s wheat forecasts recognized the slowing end season shipping pace, lowering exports by 15 mb to 970 mb. While that was partially offset by a 7 mb increase in food use, May 31, 2020 wheat stocks were increased by 8 mb to 978 mb—6 mb more than the consensus guess.  In its first winter wheat yield survey of the season, USDA pegged new-crop wheat production at 1,866 mb on yield of 49.495 bu/ac. with winter wheat projected at 1,254.6 mb on yield of 51.7 bu/ac.  Illinois SRW wheat yield is seen at 72.0, Kentucky at 76.0 , Indiana & Ohio at 74.0, 79.0 in Michigan & Missouri at 65.0.  In major HRW wheat states, yield is estimated at 47.0 in Kansas, 38.0 in Oklahoma, 35.0 in Texas, 37.0 in Colorado, 51.0 in Montana & 48.0 in Nebraska.  Among the soft white winter wheat states, yield is seen at 85.0 in Idaho, 62.0 in Oregon  & 72.0 mb in Washington. By wheat class, USDA forecast HRW wheat output at 733.4 mb, SRW wheat production at 297.5 mb & white wheat supply at 223.7 mb.  Tuesday’s  data implied that USDA expects total hard spring wheat & durum wheat production will total 611.4 mb—down 5.7 mb from 2019/20 & winter wheat to decline 49.4 mb from last year.  New-crop demand is expected to drop 52 mb as exports decline 20 mb to 950 mb, feed/residual falls 35 mb to 100 mb, food use rises 2 mb to 964 mb & seed use climbs 1 mb to 61 mb.  USDA foresees May 31, 2021 wheat ending stocks slipping to 909 mb, the lowest since 2014/15’s 752.4 mb, but still a plentiful 43.8% of usage.  New-crop average farm gate wheat price is forecast to equal to this year’s $4.60/bu., second only to 2016/17’s $3.89/bu. as the lowest since 2016/07’s $4.26/bu. 
 
USDA reserved its most bearish projections for its global wheat report.  World wheat production is forecast to rise 4.19 mmt above last year’s record to 768.49 mmt as reductions in the US (-1.48 mmt), the EU (-11.78 mmt) & Ukraine are more than offset by production increases in Argentina (+1.5 mmt), Australia (+8.8 mmt), Canada (+1.65 mmt),China (+1.41 mmt), Kazakhstan (+2.05 mmt), Pakistan (+1.8 mmt) & Russia (+3.39 mmt). Global domestic usage is expected to rise 4.94 mmt to a record 753.49 mmt.  But with production forecast to exceed usage for the seventh time in 8 years, 2020/21 ending stocks are expected to jump to a record 310.12 mmt & record-high 41.2% of usage.  As long as governments around the globe are willing to subsidize farmers to produce more than is needed, stockpiles will rise until Mother Nature intervenes. 
 
After corn, soybean & wheat basis levels held steady on Tuesday, local corn basis was 2c higher, bean basis was 2c lower & wheat basis was up a penny on Wednesday. Water levels along parts of the Illinois River are elevated, but the Mississippi River at St. Louis has remained well below flood stage.
 
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"Closing Comments" are written by David Marshall, First Choice Commodities LLC, Nashville, IL.  To learn more about his farm marketing advisory or commodity brokerage services, contact him at dmarshall@firstchoicecommodities.com or call (618) 327-4370 (voice/fax) or (618) 314-0918 (cell). This commentary is not intended for specific trading strategies. We strive to insure this information is reliable, but we cannot guarantee its accuracy or completeness.  Commodity trading involves risks. You should fully understand those risks before trading.