Multiple forces driving grain futures
July 18, 2016
by Ron Sterk
KANSAS CITY, Mo. – Corn, wheat and soybean futures have had plenty of fundamental developments to trade on in recent weeks, including forecasts for a hot, dry summer followed by timely rainfall across key growing areas, US Dept. of Agriculture (USDA) Acreage and Grain Stocks reports that brought some surprises, and a vote by the United Kingdom to exit the European Union that triggered a rise in the value of the dollar.
Univ. of Illinois agricultural economist Darrel Good noted in his July 5 Weekly Outlook that December corn futures gained 80 cents per bushel from April 1 to June 17 on concerns about Brazilian corn production losses, strong US export sales and ideas US farmers would plant less corn than they indicated in March.
“The price of that contract has since declined 95 cents and is currently at contract lows,” Good wrote. Last week corn futures sank to 20-month lows. Pressure came from a turn to more favorable weather early in July and bearish USDA data a week earlier.
The cooler, wetter late June/early July weather brought respite to many areas that had been unseasonably hot and dry during much of June. The most recent rainfall across the Midwest was especially timely for the corn crop as it entered its key pollination phase (which largely determines yield) a few days earlier than normal. It remains to be seen if the favorable weather holds or conditions again turn hot and dry, which could have a greater impact on soybeans during the key blooming phase later in the summer.
US corn production earlier was projected for 2016 at a record high, although the first USDA survey-based estimate won’t be out until Aug. 12. The USDA’s June 30 Acreage report did nothing to dissuade that projection. The averages of pre-report trade expectations were low for corn and wheat planted area and high for soybean area compared with the USDA numbers.
Corn planted area was estimated at 94.1 million acres, up 7 percent from 2015, more than half a million acres above March intentions and the third highest on record. The average trade expectation was near 92.8 million acres.
The June 30 USDA Grain Stocks report estimated June 1 corn and soybean stocks well above the average of trade expectations, which added pressure to both markets, although soybean futures initially traded higher based on the Acreage report, which estimated soybean planted area at a record 83.7 million acres, up 1 percent from last year but below the average trade expectation that was near 84 million acres. But soybean futures declined sharply, and soybean meal fell the daily limit in several contracts July 5, again mainly on improved weather, which will continue to be the key market driver throughout the summer.
The “Brexit” turmoil and its impact on the US dollar and other currencies mainly was a concern for US exporters as a strong dollar tends to discourage exports because it makes US products more expensive. If the dollar strength lasts, it will be interesting to see the impact on US grain exports, which have been a bright spot early in the 2016-17 marketing year for wheat. Wheat export inspections in the first month of the 2016-17 marketing year (beginning June 1) were up 41 percent from the same period a year ago.
The other bit of good news for wheat is the apparently much better quality of the 2016 soft red winter crop compared with soft red crops the past couple of years that had high vomitoxin levels in many areas, which resulted in high basis for limited amounts of good quality wheat.
The bad news for wheat is ample global and domestic supplies. Global wheat production in 2016-17 is forecast by the USDA as second only to last year’s record crop, and ending stocks are forecast record high. Adding to wheat’s woes is a high-yielding, low-protein US hard red winter wheat crop, much of which is expected to end up as livestock feed, which translates to lower prices and likely will add pressure to corn prices. Chicago and Kansas City wheat futures were at contract lows as July began and some contracts touched 10-year lows last week.
All wheat planted area was estimated at 50.8 million acres, down 7 percent from last year. The average trade expectation was near 49.7 million acres.
One thing that didn’t change despite all the rhetoric about GMO labeling was area planted to bioengineered crops in 2016. Bioengineered corn comprised 92 percent of total corn planted area, and bioengineered soybeans made up 94 percent of total soybean planted area, both unchanged from 2015, the USDA said in its Acreage report.