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Review of Agriculture Commodity Prices - July 2019

Review of Agricultural Commodity Prices

Corn
Corn fell 2% sequentially in July, but increased 22% from year-ago levels.  The commodity rallied 10% through mid-month, but fell 8% based off of the USDA acreage report and improved weather.
The key drivers to the corn price continue to be 1) US-China trade negotiations 2) ratification of the USMCA where Congress looking to make substantial changes to the agreement 3) wet weather in the mid-west and 4) flooding has substantially slowed down movement of grain to ports in America.
 
In mid- July, it did seem like trade tensions were reducing as China approved several domestic companies to make duty-free purchases of US soybeans, corn, pork and cotton (all of since been cancelled).[1]  However, the trade negotiations are a very fluid situation and very hard to predict.
 
The USMCA was ratified by Mexico but is delayed by the Democratically controlled House of Representatives.  It is unclear as to when the issues raised by the Democrats will be resolved.
 
Markets did rally in anticipation of lower estimates of the corn crop before the August 12th World Agriculture Supply and Demand Estimates (WASDE) report.  However, the report was very bearish for corn with the report indicating that the corn crop is estimated at 169.5 bushels per acre (bpa) (trade estimates before the report was 164.8 bpa).  The ProFarmer yield estimate for corn, released on August 23rd, was 163.3 bpa (note, the ProFarmer yield estimate is historically approximately 4.6 bpa lower than the actual final USDA yield released in January of each year).[2] If the ProFarmer yield estimate is lower by 4.6 bpa this year, the final yield would be 167.9 bpa which would be very in line with USDA August estimate.  This summer will be an excellent test of seed genetics and if late planted corn can still generate strong yields, and this could be long-term bearish for corn.
 
Possibly the biggest issue in the August 12th WASDE report is the acreage number used for corn.  The WASDE report indicated 90 million acres of corn planted, while the Farm Service Agency (FSA) indicated there was approximately 86 million acres of corn planted.  To reconcile this discrepancy, some growers do not participate in programs reporting data to the FSA.[3]  The Prevent planting acres are also confusing – if there is 90 million acres of corn planted and there are 11 million acres of prevent plant, does that mean the total corn acreage is 101 million acres (beating the record of 97 million acres of corn planted)?  One answer to this, is that many farmers claimed corn acres for prevent plant, and then planted beans as a cover crop.[4]
 
Finally, logistics continue to be a problem due to flooding.  Although a force majeure was lifted on June 18th (declared on May 2nd) on the Illinois River, there are still delays of two to four days.  This issue reduce US competitiveness with World markets, limits exports and create challenges for domestic processors (i.e. ethanol plants) to acquire competitively priced corn. 
 
Other issues impacting the corn market are;
 
  • The uncertainty of how much of the corn crop will be harvested.  Historically, approximately 91% of the corn crop is harvested, however, this year, given how much corn has been planted for prevent plant/insurance reasons; the percentage harvested could be lower than historical norms.
  • South American corn could limit the longer-term levels of corn.  South American corn output will likely increase by at least 35 million tons, or more than 31%, due to an increase in corn production in Brazil and Argentina.  The safrinha corn yields were excellent and they were able to sell at good prices.[5]
  • Corn exports are well behind the prior year through June as U.S. corn exports are lagging year ago levels by more than 30%.  Brazilian corn shipments in July reached 6.4 million tonnes compared to 1.17 million tonnes in July 2018.[6]
  • Finally the European Union has not been a large purchaser of U.S. corn due to the sizable Ukrainian crop.[7]
Result: Without a serious weather scare (i.e. early frost), there are many headwinds for the outlook for the price of corn.

Soybeans
July soybean prices fell marginally from June but increased 4% from year-ago levels.  Prices increased in early July on weather (excessive heat) concerns, but fell as the month went on due to improved weather, large global inventories and trade tensions. 
 
The key drivers to the soybean price continue to be 1) US-China trade negotiations 2) South American crop and weather conditions 3) US weather.
 
If there is resolution of the US-China trade dispute we would see higher prices in the soybean complex, however it may be tempered by the reduction of hogs in China due to African Swine Fever.
 
South American soy crop will be sizeable due to high soybean prices and weak currencies.  Infoma expects Brazil soybeans acreage to increase 1.9%.[8]
 
Finally, US weather will play a critical role.  Soybeans are “made” in August and weather this time of the year, for a late planted crop, is extremely important. 
 
Result:  Although weather concerns could temporarily move soybeans higher, movement in the US- China trade dispute (with positive or negative) will be the driving force behind the price of soybeans.
 
Wheat
After rising more the $1 a bushel in June, wheat prices fell as US wheat harvested picked up speed.  The Average July wheat prices declined 4% sequentially but are in line with prices seen a year ago. 
 
The biggest drivers in the wheat market are 1) weather, particularity Europe 2) the status of the US corn crop (if in doubt, there would be a greater demand for wheat).
 
Weather in Europe has been hotter than usual in Europe impacting the wheat crop there.  The Europeans and Russia beginning stocks levels are relatively low and poor weather will impact them further.  It is also unclear about the quality of the European wheat crop given the Russian crop came off early indicating that could be quality issues[9].   
If there are further issues with the US corn crop, US wheat will be in demand to be used as feed in the next 6-12 months.  This is one issue where attention needs to be given.

Result:  Out of the three commodities, this is the one with the greatest likelihood of price increase in the medium term.      
 
 
[1] Commodity Catch Up - August 12, 2019 – BMO Capital Markets
[2] https://agresource.com/33257-2/
[3] August WSDE Estimates Usually Good Predictors ;Ag Bull Case Lowers, now what – August 12, 2019 – BMO Capital Markets
[4] Ibid.
[5] http://www.soybeansandcorn.com/news/Aug8_19-First-Look-at-201920-South-American-Crop-Production
[6] Commodity Catch Up – August 12, 2019 – BMO Capital Markets.
[7] Ibid
[8] Ibid
[9] Commodity Catch Up – August 12, 2019 – BMO Capital Markets