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USDA Numbers Add Fuel To Fired Up Markets

Monday, February 1, 2021
filed under: Marketing/Risk Management

         The markets have been on fire for the past several months and the January 12th USDA reports added more fuel to the fire.  Corn, soybean and wheat futures all set new contract highs following these reports and traded at the highest levels in seven years.
        Here are some of the January USDA report highlights that continued to push markets higher:
        Soybeans – The USDA reduced the 2020 U.S. soybean yield slightly and reduced production slightly. They increased the crush and exports estimates slightly.  Ending supplies are now projected to be 140 million bushels, compared to 170 million bushels in December.  They made no change to Brazil’s soybean production and dropped Argentina from 50 to 48 MMTs.  They left China’s imports at 100 MMTs.  Ending supplies of 140 million bushels is essentially bin bottom.  Many analysts believe the actual number will be smaller than that.
        Corn – The USDA’s final corn production estimate for the 2020 crop cut the corn yield 3.8 bu/ac (325 million bushels) from the December report.  This was totally unexpected.  Most of the yield losses came in Minnesota and Iowa and were the result of the mid-August windstorm (derecho) coupled with latter half summer drought.  They also reduced the corn export forecast and the ethanol production forecast by 100 million bushels. The trade has universally expected exports would go up, not down.
        Corn ending supplies were reduced from 1.7 billion bushels to 1.552 billion bushels. Corn was up the 25-cent trading limit on talk the “real” corn ending supply number could be as low as 1.2 to 1.3 billion bushels. 
        The USDA also made minor changes to the corn production forecasts for Brazil and Argentina.  They kicked those cans farther down the road.
        Wheat – There were just minor adjustments made to the U.S. and world wheat numbers.  U.S. wheat ending supplies were reduced slightly.  Bullish corn makes bullish wheat.
        Soybeans aren’t the only oilseed with bullish fundamental numbers. The world sunflower situation might be the tightest it’s ever been, as shown in the chart below.
world oil sunflower chart
Source: USDA

        Short sunflower crops in the EU and Black Sea regions, coupled with strong demand, have depleted sunflower supplies.  China has also been an aggressive buyer of canola from Canada and the EU, and that, coupled with smaller canola/ rapeseed crops across Europe, has also tightened the world rapeseed situation.
        Weather across much of Argentina has remained warm and dry. The various production estimates for Argentina have yet to reflect the full extent of the dry conditions.  Southern Brazil has also been dryer than normal. It has been a typical La Niña season so far in South America.
        The next phase of this bull market will depend upon how crops in Brazil and Argentina finish.  That means corn as well as soybeans.  China’s appetite for corn and soybeans has been much stronger than expected.  Their hog herd has expanded by more than 30% and their economy is gaining strength.  They have recently been buying new-crop soybeans from the U.S.
        U.S. soybean ending supplies are now projected by the USDA to drop to 140 million bushels.  Six months ago, the market was looking at a billion-bushel ending supply number.  Six months ago, we were projecting corn ending supplies could exceed 3.5 billion bushels.  It could now drop below 1.5 billion bushels.
        These tightening ending supply numbers mean corn and soybeans both need more acres in 2021.  Six to seven million more soybean acres doesn’t solve the problem.  Corn can’t afford to lose acres. This means spring wheat, sunflower, barley, dry beans, etc., could lose significant acres to corn and soybeans this spring. Remember that 40% to 50% of the U.S. Southern Plains hard red winter wheat crop went into dormancy in poor condition.  The entire western half of the U.S. and western Canada is very dry.
        The tightness in world oilseed and corn markets means the 2021 Northern Hemisphere growing season will be closely watched.  We need above-average crops to prevent ending supplies from dropping to dangerously low levels.
        Perhaps more significant is that China now holds 67% of the world’s corn ending supplies and 50% of the world’s wheat ending supplies, and they are now major importers of both those crops in addition to soybeans.                                                                        
* Mike Krueger founded The Money Farm, and is now a senior analyst with World Perspectives, a Washington, D.C.-based consulting company.  While the information in this article is believed to be reliable, marketing involves risk, and the author and The Sunflower assume no responsibility for its use.
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