Ample Supplies of Grain Run Up Against Weak Demand

Date: Tuesday, July 14, 2020
Source: The Wall Street Journal

U.S. grain supplies are expected to be plentiful this year. The question facing farmers is what demand will look like.

U.S. farmers are expected to grow large corn and soybean crops this year—but it is still unclear if an economy recovering from coronavirus will be strong enough to consume an ample harvest.

In a report Friday, the U.S. Department of Agriculture cut its production estimates for U.S. corn by nearly 1 billion bushels, bringing the total to 15 billion bushels. Meanwhile, U.S. soybean production is expected to rise to 4.14 billion bushels, up slightly from last month’s estimates.

Some grains traders were expecting to see bigger reductions to grain supplies after the USDA last month cut its estimates for how much corn farmers have planted this year—reducing its estimate for planted corn acres by 5 million acres to 92 million acres. At the close of trading Friday, most-active corn futures finished down 3.4% and soybeans finished 1.2% lower.

The focus for traders now is on how dry this summer in the Midwest is. Grain futures trading on the Chicago Board of Trade have been trending higher recently amid hopes that hot weather in the U.S. Corn Belt will shrink otherwise-ample U.S. crop supplies.

In the past two weeks, most-active corn futures have risen over 8%, while soybean futures have gained over 4%.

But it may take more than above-normal temperatures to meaningfully shift the current supply and demand situation, said Brian Hoops, president of Springfield, Miss.-based agricultural brokerage Midwest Market Solutions Inc.

“Unless we have some large drought in the Midwest, it will be high supply and uncertain demand,” said Mr. Hoops.

As of the USDA’s most recent crop progress report, 71% of the U.S. corn crop is in either good or excellent condition. That is up from 57% at this point last year, when record rainfalls complicated the planting and sprouting of crops.

Temperatures in the Corn Belt are expected to stay hot over the next 6-10 days, according to agricultural weather firm DTN. However, isolated rainfall is expected, which may mitigate the heat’s effect on crops planted in April and May.

“Corn is most vulnerable at pollination, which means that the next couple of weeks are critical for determining its yield potential,” said Arlan Suderman, chief commodities economist at StoneX, in a note Friday. In today’s report, the USDA maintained its outlook for corn yields at 178.5 bushels per acre—up from 167.4 bushels per acre last year.

Whether or not weather diminishes farmers’ harvests later this year, it remains unclear when and if grain demand will recover enough from pandemic shutdowns for U.S. farmers to sell their crop.

“Demand is certainly the question mark,” said John Newton, chief economist with the American Farm Bureau Federation.

Coronavirus cases in the U.S. have surged in recent weeks—led by new cases in California, Florida, and Texas. Stay-at-home orders and business closures this spring took a bite out of grain demand, with ethanol production, livestock feed, and food products using less grain amid reduced consumer demand.

In its report Friday, the USDA said that it expects consumption of corn by the U.S. ethanol industry to fall by another 50 million bushels. That brings the projection for total domestic corn consumption to 12.5 billion bushels, which is down from last month’s forecast.

Production of ethanol in the U.S. plummeted to 537,000 barrels a day in late April, the lowest figure since the U.S. Energy Information Administration started keeping the data set in 2010. Ethanol production has bounced back, with production hitting 914,000 barrels a day this week. However, it is still down 13% from the same time last year.

How much U.S. grain exports China will buy as a result of the phase one trade agreement between the two countries also remains to be seen. However, in a separate release this morning, the USDA confirmed that China purchased 1.4 million metric tons of U.S. corn—with just over half of that for delivery in this marketing year. It is the first confirmation of large Chinese purchasing in two weeks.

Speaking to reporters Friday, President Trump cast doubt on going forward with a phase two trade deal between the two nations, citing dissatisfaction with China’s response to the coronavirus outbreak.


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