As is the case every July, U.S. weather played the dominant role in agricultural futures markets this month. For the corn belt, it was a very good month; it was the fifth rainiest July in the past 121 years and temperatures were exactly in line with the long term averages. Not surprisingly, many have started to discuss record yields for corn and soybeans. We believe that is a reasonable assumption for corn, but a bit premature for soybeans.
For corn, the two major producing areas outside of the United States are China and South America. In China we expect a crop similar to last year on slightly reduced acres, and in South America they are finishing a disappointing crop. Recall that Argentina’s corn crop was hurt by flooding and Brazil’s safrinha corn crop was severely hurt by a drought. The latter crop looks to finish 12 to14 million metric tons (MMT) below the estimates of six months ago. As a result, we’re seeing record domestic corn prices in Brazil and their feed industry has been severely hurt. Brazil has already become a corn importer, buying nearly a million tons from Argentina. That has elevated Argentine prices to a level that is uncompetitive with the U.S. and has led to sharply higher export estimates for this country, both old and new crop. The USDA has raised old crop exports by 250 million bushels in the past three reports and new crop exports by 150 million bushels in the past two reports.
Along with crop conditions in the key growing areas, the other corn variable we’ve been watching closely is the de-stocking program in China. Recall they have a two-part program that aims to discourage imports and reduce government stocks. To date they’ve made modest progress, with imports of feedgrains and byproducts five MMT below last year and with 12 MMT sold at auctions. The auctions started in late May and appeared to be struggling in mid-July when back-to-back auctions sold less than 1% of what was offered. The final July auction, with 10.8% sold, was slightly more encouraging.
Wheat was the first U.S. crop to have a record yield in 2016 with an incredible 48.6 bushels per acre, breaking the old record by one and a half bushels. That allowed us to produce a crop that is 209 million bushels bigger than last year’s on five million fewer acres.
Overseas the wheat crops are sharply divergent. Western Europe, most notable France, is suffering through poor weather. Eastern Europe and western Asia, most notably Russia, has had ideal weather. The French crop is nearly 10 MMT below pre-season estimates while the FSU is up by nearly the same amount. All of this led to a very rare export sale of a panamax of wheat from Romania to France this past week. Russia has been the low price setter in world wheat this summer, but we expect the French purchase and the return of Egypt, the world’s largest wheat importer, to help stabilize prices. Egypt had two successful tenders this month following the reconciliation of their ergot tolerances.
Record world wheat stocks have weighed on U.S. futures markets and have widened carrying charges considerably. The SRW futures contract in Chicago is about to trigger its second increase in its Variable Storage Rates (VSR). This will take the cost of holding delivery stocks up to 11 cents/month, 2 3⁄4% per month on a four dollar commodity. In the futures market we’ve seen the September ’16 – July ’17 spread trade as wide as 76 cents. For an Index Fund or an ETF that needs to roll a long position forward, that’s an annualized cost of 22.8%.
Meanwhile, wheat has priced itself into many key feed rations around the world. The USDA increased world wheat feeding by 11 MMT in its July WASDE report and we expect another increase in their August report. Chicago wheat ended the month at contract lows, but we believe it has good value at these levels.
Soybeans were the biggest mover in July, finishing $1.50 (13%) lower. It got there by breaking an impressive $1.90/bushel the first three weeks of the month and then rallying 40 cents the final week. Support came from strong cash markets and China’s return to the export market. Even this late in the crop year there is a wide difference of opinion on Chinese imports. Estimates are as low as 79 MMT and as high as 83.7 MMT. For new crop, estimates range from 82-89 MMT, so their return was a very welcome sight for the bulls.
China has stated that they want to be a net seller of 4.5 MMT of soybeans from its government owned reserves, but they seem less committed to this than they are to selling corn. The soybean auctions started eight weeks after corn and there have only been three of them. The percentage sold at each auction has fallen sharply from 99% to 14% and they’ve only sold 717 KMT. In addition, Sinograin bought cargoes this past week for October, April and May. As the entity charged with managing the reserves, their past purchases have always been geared toward replacing what was sold at auction. This 4.5 MMT variable is second only to crop size in importance as far as setting balance sheets and determining forward prices.
As with corn, there is already talk of record soybean yields. While that possibility clearly exists, and the ratings confirm that, only one-fourth of the crop has even started to set pods. If the current forecasts for August prove correct, then a yield of 50 bushels per acre, or better, can be expected.
As we head into the most important month for the U.S. soybean crop, it’s hard to believe that we’re only a month and a half from the start of planting in Brazil. Estimates are that Brazil will increase both corn and soybean acres and that Argentina will switch 7% of their soybean acres to corn and wheat and that their total planted acres will increase. It’s worth noting that even with this summer’s significant drop in prices, we are still adding acres in both countries.