This is the SFN Market Report with Brooks Schaffer of Palmetto Grain. Reach him at brooks@palmettograin.com or 843-540-4540.
Friday was USDA report day. The September report can be a big market mover because it is the first report USDA uses objective field measures of yield. They use those measurements in addition to updated farmer surveys and satellite data to update their yield estimate. In the last few years, we have also seen big surprise changes in acres that changed the balance sheet more than the yield adjustments. USDA did not make a big surprise acreage change on this report. USDA made a large cut to corn yield, cutting it by 2.2 bushels to 178.5 from 180.7 on the last report. That was very close to the average estimate and is a very big cut historically for this report. On soybeans, they raised yield by a tenth of a bushel. USDA dropped corn carryout to 1.567 billion bushels and lowered bean carryout by 10 million bushels despite the increase in yield.
Right after the report, corn rallied, getting as much as 10 cents higher before succumbing to selling pressure. Corn was pulled lower by selling pressure from beans. It was also the end of the week, with the funds and money flow remaining firmly in control of the market. Beans closed down 35 cents on what was not that bearish of a report. USDA did not give us some big bearish surprise to digest, so likely the market goes right back to trading the other things going on in the world right now.
Russia continues to talk about the possibilities of peace, but at the same time is hitting Ukrainian grain infrastructure harder. Just this week, they hit a Bunge sunflower oil plant in Ukraine. They are also hitting the overland routes Ukraine is trying to use to get grain out since the Black Sea is shut down. The market has a noticeable drop every time peace is mentioned, but then when the missiles start flying again, the market recovers. There is a push to try to stop the attacks on grain for humanitarian reasons, but Russia has been hit so hard by Ukraine, it is unlikely they will abandon an avenue they can use to pressure Ukraine. Wheat gets all the attention in the headlines, too, but Ukraine is an important exporter of corn and sunflower oil as well. Soybean oil will be a follower of any big moves in sunflower oil if there are shifts in export flows.
We also have inflation readings heating up again with the rally in energy prices. Ag commodities are correlated to inflation expectations even stronger than oil is. That is another reason fund money will want to be long all ag commodities.
Concerns about U.S. production started the rally in July. Since then, we have added aggressive Chinese buying of U.S. soybeans, a shutdown of grain shipments through the Black Sea due to re-escalation of hostilities between Ukraine and Russia, bullish biofuel policies in the U.S. and other countries, a rally in energy prices, escalation of hostilities in the Middle East, and increasing inflation expectations. The concerns about U.S. production were warranted, as U.S. crop size has been disappointing. The heat midsummer did more damage than many realized. The crop in the east is better, but it still has a lot of production loss to offset in the west, where the heat was more extreme. We have had several years of lower prices that supercharged demand. Now we have energy prices rallying, which will make it harder to slow biofuel demand. Spec money is pouring money on the long side of ag commodities. We have multiyear and all-time highs in fund length. China is buying U.S. soybeans not because they are the cheapest, but to appease the administration and hopefully buy some goodwill to back off trade restrictions. We are going into a crucial growing season in South America with a super El Niño.
For all these reasons and more, we can make a bullish case that commodity prices will continue to rally. But the situation could also change, and a shift in money flow could cause a very big pullback in the market. The market has given us a gift, and we need to be scaling in sales and working orders.