This is the SFN Market Report with Brooks Schaffer of Palmetto Grain. Reach him at brooks@palmettograin.com or 843-540-4540.
The August WASDE report can be a real market mover, and I am glad to have this one behind us; the fact it was bullish is the icing on the cake. USDA dropped corn yield by 2.3 bushels to 180.7 from its 183.0 trend estimate. That was barely above the lowest pre-report estimate. For soybeans, USDA dropped yield 0.3 bushels to 52.7 from the 53-bushel trend estimate, which was similarly on the low end of the pre-report estimates. That was very bullish by itself, but USDA offset some of the bullish effect by also raising acres. USDA added almost 1.2 million corn harvested acres and nearly 1.4 million bean acres. This brings flashbacks to last year’s debacle when, from August to January, they somehow found 2.5 million more acres of corn. The acreage increase on Wednesday’s report offset the yield loss and actually increased total production for both corn and beans. However, USDA acknowledged unprecedented demand and raised both old-crop and new-crop exports, which lowered old-crop corn and bean carryout and also lowered new-crop corn. If you take USDA’s carryout numbers at face value, we are not in danger of running out of corn, but we are tightening up the balance sheet compared with last year, and we have used up most of the margin of error. There is very little margin for error left in the face of growing demand and uncertain production. For soybeans, USDA’s old-crop carryout is very close to last year, with rapidly growing domestic demand and uncertain Chinese export demand. That buffer will be used up quickly if China keeps buying at the pace it is currently.
Early in the spring, the market priced in perfect crops and growing carryouts. The funds were willing to pile on the short side of the ag markets. A weather scare, Chinese buying and increasing geopolitical risks have flipped that on its head. We now have increasing demand and possibly decreasing supplies. We usually have some kind of weather scare during the growing season, but the scare is often short-lived, and so is the rally. This is different from just a weather rally since it is partially driven by increasing demand. That component can give the rally more legs. The possibility of further trimming carryouts gives speculative money pause before piling in on the short side of the market. It gives them pause before aggressively selling ags.
China continues to buy U.S. beans almost every day ahead of the meeting with Trump in September. USDA did not account for significantly more Chinese purchases yet, so that will need to be priced in depending on how much they end up buying. If beans lose a tenth or two on yield and China buys a few more, the market may have to really ration demand. And ration demand in the face of rapidly declining bean oil stocks despite record crush.
We still have production risk as the growing season continues in the Midwest. The weather has become less threatening for now, but the long-term models still do not have good accuracy. We have production uncertainty because we do not know how much damage has been done already. We have geopolitical uncertainty with all that is going on in the world. We have increasing demand. It seems very unlikely the funds would want to pile on the short side of the ag markets with all the known and unknown unknowns. The bulls have some fodder for now, but we will need to keep feeding them to keep rallying.