Corn Commentary


USDA Supply/Demand Report – 6/10/15

By Tom Fritz
EFG Group, LLC
Partner, Grain Analyst

Highlights of the USDA Corn Supply Demand report US old crop – lowered domestic usage (ethanol) by 25 million bu.), Increased carryout by 25 million bu. – US new crop – increased the carryin by 25 million bu., increased the carryout by 25 million bu. – World old crop – increased Brazilian production by 3.0 M T., increased Argentine production by 500 K T., increased carryout by 4.51 M T. – World new crop – Increased carryin by 4.51 M T.; increased carryout by 3.25 M T.

Flat price ran steady to firm Tuesday night – was under the gun from the start of the day session.  The new record in the grind for ethanol barely caused a blip in the market action.  The flat price tried to knee-jerk back lower shortly after the USDA data was released but that didn’t last long as wheat prices kept diving.  The biggest surprises from the USDA were the World numbers – the old crop carryout increased 4.5 M T. vs. trade expectations and the new crop carryout increased by 3.3 M T. vs. trade expectations.  The US data was close to trade expectations; the old crop carryout was 17 million bu. lower than expected and the new crop carryout was 8 million bu. less than expected.  Now that these numbers are out the trade’s focus will move back to the weather forecasts.  A good portion of the western and central Corn Belt is expected to see some big time rains over the next 5 days.  Prior to the report the trade had been focusing on the recent excessive moisture so we’ll see how these forecasts materialize and go from there.

Most interior cash markets continue to a trend of easier basis levels that started in the last week.  I’ve been told that the recent rally in the flat price has indeed attracted farmer selling.  Spreads have been weak all week and for the most part that continued today, Wednesday.  Tomorrow is the last day of the Index fund roll – many have been attributing the recent spread weakness to that as well as the cash movement.   the bottom line to that rationale – everyone and their neighbor is well aware of when the index funds roll – the weakness in the spreads has been all about cash movement and the idea that our recent better export activity is going to slow down as SA origin comes on line.  Until a legitimate threat to the crop comes along spreads will be biased to stay wide.

The flat price balks within shouting distance of the May interim highs.  The market is now in line to test out the possible bottoming action we saw in late May.  If that price action we saw in late May is indeed a bottom July corn should realize support beginning at the $3.55-$3.54 level.  The same would hold true for December corn beginning at the $3.72 level.  Until more is known as to the development of the corn crop I would like to think our worst case scenario is a trading range affair between the late May lows and the May interim highs.

Highlights of the USDA Soybean Supply-Demand ReportUS old crop – increased crush 10 million bu., increased exports 10 million bu., lowered carryout by 20 million bu. – US new crop – lowered the carry-in by 20 million bu., increased crush by 5 million bu., lowered the carryout by 25 million bu. – World old crop – lowered carry-in by 630 K T., increased production by 1.0 M T., increased usage by 2.2 M T., lowered carryout by 1.74 M T. – World new crop – lowered carry-in by 1.7 M T., increased usage by 1.36 M T., lowered carryout by 3.0 M T.

Strength early in the session followed by weakness after the USDA report finishing modestly lower on the day.  Crush margins continue astonishingly strong due to continued unexpected demand for products aggravated by crusher down time.  Weather worries (excessive moisture) lend support to the new crop.  If there were any surprises to the USDA report it were World carryout projections coming down more than anticipated.  Now that the USDA is behind us focus will return to the weather.  Given the wet forecasts for the already wet areas trade talk will remain around prevent planted acres for soybeans.  On the March acreage report the thought was the USDA estimate for planted acres was too low – now that we have some weather worries for the beans that are left to be planted the end result might be unchanged acreage vs. the March projections.  It is my thought that until crush margins begin to erode it will be tough to sustain a break in old crop beans.  New crop beans will probably stand in until we see how much moisture passes through over the next 5 days.  Longer term forecasts continue to show a wet bias.

Processors’ basis continues strong for beans; the export basis not so much.  The gulf market eases as export demand may finally be winding down.  Crush margins remains the strength in the bean spreads.  I still get the impression that the spec trade was/is too short and the end-user anticipating lower prices became short bought.  The bottom line is that most spreads in both beans and meal continue to point higher.

The grind higher in soybeans that started in late May is striking similar to the grind higher we saw in April.  The bean market did register a minor reversal for the current move higher.  Daily momentum indicators still point higher.  The meal market registers a minor reversal for the current move higher as well.  Bean oil looks like it is in sell stop territory.  As long as crush margins remain strong I have to think it will be difficult for the old crop bean market to sustain much of a break.  As far as the meal market is concerned – have we flushed out enough spec shorts to sustain a break?  As goes the meal market so will go the bean market.

Highlights of the USDA Wheat ReportUS new crop – Increases winter wheat production by 33 million bu. (HRW +34 million, SRW -2 million, white +1 million), increases total wheat production 34 million bu., increased the carryin by 3 million bu., increased feed usage by 15 million bu., increased the carryout by 21 million bu. – World new crop – lowered the carryin by 560 K T., increased production by 2.62 M T., increased usage by 2.97 M T., lowered the carryout by 920 K T.

The conspiracy theorists will suggest the report was leaked as prices were no better than steady Tuesday night and under the gun since the beginning of the day session.  Losses became more severe after the USDA data.  Adding to today’s sell-off are reports of rain getting into the forecasts of the dry areas of western Europe and in the Black Sea areas.  In recent days these areas have become a bit of a concern due to heat and dryness.  So where did the increase in production (+33 M bu.) come from considering all of the hot line reports of the central southern Plains being devastated with too much water? Kansas production increased by 42.5 M bu., Montana up 6.9 M bu. was offset by losses in Texas -11.25 M bu. and Oklahoma -4.1 M bu.  That pretty much tells it all.  Harvest has barely started so we should get a better handle on production next month.  Be it known that more heavy rain is in the forecasts for parts of Oklahoma and Kansas over the near term.  The bulls will say the USDA doesn’t report quality or test weight as all they know are bushels.  The however, there, is the USDA did increase feed usage by 25 million bu.

Basis levels continue to be quiet and spreads remain soft.  How much of the soft spread action is due to the index fund rolling (tomorrow is the last day), the idea of poor quality or just no one wants US wheat?

The flat price balks at price levels that held prices back all this spring.  That advertises an ongoing trading range affair.  We can talk long term bottoms all you want but until prices eclipse the $5.40-$5.50 level in July Chgo wheat and at least the $5.65 level in July KC all we have is a broad trading range affair.  I guess the old adage that the only way you can hurt a wheat crop is with a flame thrower holds true for now.