By: Dan Hueber –
The May supply/demand report has now been resigned to the record books and for the most part, both bulls and beans emerged from the post-release action relatively unscathed. I had commented earlier this week that the May report generally would hold few surprises but that is not to say that it should be considering inconsequential as it technically sets the bar from which we can gauge development, or lack thereof, as we move through the growing season. The reports themselves, we generally considered to lean towards the positive side as most ending stocks numbers came in towards the lower side of estimates and in the case of beans for next year were well below, and I would contend that when you consider the time of the year and dig just a bit more into the numbers, they have passed control of the ball into the hands of the bull.
Let’s look first at corn. 2016/17 carryout was reduced 25 million bushels providing a little positive head start for the new crop balance sheet. The most obvious, and expected change though came via the total production estimate as with the lower acreage and a return to projected trend-line yields, we will potentially slice 1.083 billion bushels from our production. While if that we all to come straight from the bottom line, corn would have been limit higher for days but of course with larger carry-in to begin and a projected cut of 345 million bushels in total usage, the 2017/18 ending stock were trimmed by just 185 million bushels. Regardless of the size of the cut, what is notable here is this will potentially be the first lower carryout in the past five years either a raw number or measured as a stocks to usage ratio. Simple logic tells us that if ending stocks are trending lower then prices in turn should trend sideways to higher. This is where it becomes fun to play a bit with “what-if” scenarios, particularly knowing that all the risk of the growing season lays ahead.
The most obvious place to look first is yield and while at 170.7, it is nearly 4 bushels below last year, it would still rank as the third highest yield on record. Of course, at this point there is no accurate way to predict what the final yield will be this year but for sake of argument, if we take the average of the past four years you would come up with a yield of 168.20. (I intentionally left out the drought year of 2012/13.) If all else were left unchanged, this yield would cut another 206 million bushels from total production, which does not sound terribly significant other than the fact that it would potentially drop ending stock below 2 billion (1.904) and psychologically I believe that would be positive for the corn market. Of course, the argument could then be made that any higher price could cut usage but the USDA already sliced the overall corn usage by 350 million versus the current marketing year, primarily through a reduction in exports, taking them down to 1.875 billion. Keep in mind that if that were correct, it would be the second lowest export number since the drought year. The average for the past four years has been 1.976 billion. Note as well that on the global scale, the ending stock for corn will be reduced to the lowest point in the four years, primarily due to the US reduction and that the global corn stocks to usage ratio will be reduced for a second year in a row and will be at the lowest point since 2012/13.
All of these figures pre-suppose that this season will be pretty “average” and while still early, it appears to be setting up as anything but. As such, I have to believe that over the next 60-days or so, the burden of proof is the responsibility of the bear and it will not require much of a scare to see prices move higher. When you consider that over the past two years, even with larger planted acreage, December corn was able to make a run against the 4.50 level, it would seem that we should at least have that potential again this summer.
On to soybeans and of course this was the commodity that most felt the fundamental picture would have turned negative, but according to the estimate, that was not truly the case. A 25-million-bushel boost in the current year export projections helped lesson the potential impact of record acreage but we are still projected to produce the second largest crop ever at 4.255 billion bushels using a yield of 48 bpa. This would match the second highest yield ever. Helping to counter-balance this though is the fact that usage was pushed up to a record 4.325 billion bushels and when taken as a stocks to usage ratio, all we will have managed to do is hold at an unchanged level for the third year in a row. Bears would immediately point out that much of this has to be predicated on expanding demand from China, realistically there is nothing to suggest that it will not, particularly as they continue to expand hog production. Looking at a global perspective, even with the record US and South American production, the stocks to usage ratio has been flat-lined for the past four years and never even reached up to the levels we witnessed a decade ago. While the overall picture in beans may not quite have the potential stacked in favor of the bulls, with the global demand this robust, it would not require much of a weather disruption in either North or South America to tip the scales to the bullish side quickly.
Finally, we have wheat and this commodity received a bit of long overdue positive news in these reports and considering that we are staring at the lowest planted acreage in 40 years it should be little wonder. After a 490 million bushel cut in production versus last year, the projected ending stocks estimate was lower to 914 million. While still ample, it works out to be the first reduction in the past four years and this even with 51 million bushels cut in projected demand. Of the three commodities, wheat would certainly appear to still have the most challenging outlook as the global stocks remain right at record but appear to have leveled off over the past couple years even with no real production issues. The question that begs to be asked is, how much longer can we expect that to be the case? Also keep in mind that 49% of the world ending stocks reside in one nation; China. Do you think if there were a problem somewhere that they would flood the market with excess inventory?
Granted, there is nothing that I have presented here that is “in your face” bullish nor may any problems arise that would upset the applecart this year. That said, it would appear that the scales have begun to tilt towards lower global supplies and this even after successive years of solid world-wide production. That should point to a more positive price outlook at least through the next few months ahead and put everyone on notice that we should never grow complacent in believing supply scares have become a thing of the past. They balance between excess and shortage remains quite precarious.