This is the SFN Market Report with Brooks Schaffer of Palmetto Grain. Reach him at brooks@palmettograin.com or 843-540-4540.
Friday was another real kick in the shins from USDA on the October WASDE report and came right after the bearish stocks report the week before. The report was bearish across the board, with corn, bean and cotton yields higher after most expected yields to close to unchanged or slightly lower. Between the increase in old-crop stocks that USDA found and the increase in yield, USDA has added 407 million bushels of corn that the balance sheet has to absorb. They did throw us a bone and also increased corn usage, so new-crop carryout only increased by 282 million bushels, from 1.567 billion to 1.849 billion. With harvest in some of the most important corn and bean states so far behind average, USDA had much less harvest data to use on this report than they usually do on the October yield adjustment. It is surprising they made such a big change with less data than normal, but here we are.
The biggest increases came from states that are the most behind on harvest. Nebraska had the biggest yield increase on corn and was only 15% harvested as of Sunday, compared to 24% on average, and USDA increased yield by 11 bushels from the last report. The soybean yield increase was also pretty bearish. Soybean harvest was also well behind average for many of the big-producing states on the last update. Nebraska was 9% harvested last Sunday, compared to 34% on average. Iowa was only 5% complete last Sunday, compared to 38% on average. The Midwest got a break in the weather last week and likely made up some ground. Harvest progress will be very closely watched when it comes out today after the close. It was delayed by the Columbus Day holiday on Monday. The forecast has started adding moisture back into much of the Midwest, which will cause more delays if it comes.
Corn traded limit lower fairly quickly after the numbers came out. Unfortunately, that is the risk when we have such a big fund long position. The positive news is that it did not stay locked limit lower for long. Algorithm trading dominated the trade immediately after the report, but then, after time was taken to digest the numbers, buyers came back to the market. When you look at the close on Friday and see corn down 20 cents, it does not feel like anything good, but it is much better than if the market had hit the limit and stayed there until the close. Then the market managed a positive close on Monday for corn. Beans were even able to climb back and close higher on the day, despite a pretty bearish number for beans, too.
So what does this mean going forward? The corn carryout, after all USDA’s funny math, is still only 1.849 billion bushels. While that is not as tight as it has been, it is far from burdensome. It is still well below the psychologically important 2-billion-bushel level. A good part of this rally has been about demand, not just supply. USDA’s numbers, if taken at face value, have added some supply but also increased demand. We still have very, very strong demand for both corn and beans. The break in prices is an opportunity for buyers who may have stayed on the sidelines during the run-up. So we got the number behind us now and did not lock against the limit lower, so any spec money or otherwise that wanted to get out of the market could get out. When we get a few sessions under our belt this week, we can see how the buyers react on the cash side to the futures price action. The funds will likely be very hesitant to get short with all that is going on, but shedding the big length they had built has taken quite a bit off the market. It will likely take another headline to convince them to come back into the corn market on the long side in droves. That could be more harvest delays due to a weather shift, escalation of one of the many conflicts we have going on, or hotter inflation readings. There is a stronger correlation between ag markets and inflation than between energy prices and inflation readings.
The corn futures dropped Friday in response to USDA’s move, but the spreads did not move very much. There are still a lot of market participants skeptical about the excess of corn and oilseed bushels that USDA projected. The market will also be watching for harvest progress and yield reports to try to gauge whether USDA’s number is real. They will also be watching for flash sales to see if there is an uptick in buying with the price break. The export reports this week will be the first that report on harvest activity since the market drop from the stocks report.