Grain markets are mostly lower this morning on a bearish May WASDE and oil prices pulling back again.
“A belief is like a guillotine, just as heavy, just as light.” – David Hockney (British painter)
May WASDE Shows Us A Lot of Bad Data
Grain markets are mostly lower this morning on a bearish May WASDE and oil prices pulling back again. More broadly, stock markets are pulling back as some of the bad economic data of the COVID-19 lockdowns starts to show up.
Fears of a second wave of the COVID-19 virus would obviously push oil demand back down, just as it is trying to recover!  I’ll dig more into gasoline demand in my macro thoughts below, but of not is that Saudi Arabai is cutting another 1M barrels per day of oil production, bringing it down to under 7.5M bpd. This would be the lowest oil production from Saudi Arabia in 18 years & JP Morgan thinks it could go lower yet, to potentially 6M bpg.  That said, Austrian energy group, OMV, is in the bullish camp, saying all this production cuts will help oil prices rebound in the second half of 2020. 
It’s hard to avoid some of the food supply chain headlines out there, but given that you’re likely spending a lot of time in the fields, you might be more interested in listening than reading. That said, FarmLead COO and co-founder, Alain Goubau recently chatted with The Economist on one of their podcasts about how the supply chain disruptions are being felt on our marketplace, Combyne, but also on his family’s dairy and cash crop farm. 
May WASDE Shows Burdensome Corn Supplies
Going into yesterday’s May WASDE report, grain markets were already pretty bearish, especially for corn, as it was expecting to see nearly 3.4B bushels for new crop, 2020/21 ending stocks. That said, U.S. farmers are planting a lot of corn this year, and at a time that demand has tanked, namely in ethanol.  The reality isn’t too far off though according to the USDA, who suggested yesterday in their May WASDE report that 2020/21 U.S. corn ending stocks would total 3.32B bushels. As I mentioned in last Monday’s Breakfast Brief, I continue to be bearish on corn prices without a significant improvement in ethanol demand, and I think a 3.3B bushel print is still low.
Unsurprisingly, we’re now seeing crop inputs players like Corteva warn of weaker corn demand, which will likely have a negative follow-through impact on their business.  Ironically, the USDA raised their outlook for corn going into ethanol in 2020/21 to 5.2B bushels, up from the 4.95B bushels that they’re forecasting for the 2019/20 crop year. I think that both 2019/20 and 2020/21 ethanol numbers will be revised lower over the next few months.
And at trendline yields of 178.5 bushels per acre, U.S. corn production in the 2020/21 should nearly touch 16B bushels, a new record! Further, the USDA printed a record production number globally for corn, thanks to bigger crops in Brazil, Ukraine, Mexico, and Canada. Thinking domestically though, this all adds up to corn supplies at a 33-year high and a stocks-to-use ratio of 22%, which would be the largest in nearly 30 years.  .For perspective, the most bearish U.S. corn stocks-to-use ratios were in the mid-80s at 66% in the 1986/87 crop year and 55% in the 1987/88 crop year.  Granted, because of the recent frost and wet conditions in the Dakotas, you might not get all the acres in that were originally planned, but because of the demand destruction, the market won’t care as much. 
Will China Meeting Trade Deal Terms Save Soybeans?
On the soybean side of things, the U.S. stocks-to-use ratio is actually expected to drop to 9%, but that’s assuming that China will meet its trade deal purchasing agreement. More specifically, in the May WASDE, the USDA pegged U.S. 2020/21 soybean exports at a whopping 2.05B bushels (or 55.8 MMT), which would be a 22% jump year-over-year!
That said, China has bought a couple dozen boatloads of U.S. soybean exports over the past 2 weeks as they try to save face on the Phase One trade deal terms.  While China has pledged to buy $36.5B worth of American agricultural goods, buying the likes of corn and soybeans now when they’re cheap means they might have to buy more. ADM, on their earnings call a few weeks ago said that they think China will buy 30 – 35 MMT of American soybean exports this year. 
Despite what the USDA is suggesting in their May WASDE report, the real data shows a very different picture. As reported by CNBC, think tank Centre for Strategic and International Studies is estimating that China will buy only about $60B of American goods in all of 2020, more than 65% short of the targeted $186.6B agreed to. More specifically, U.S. soybean exports to China were down nearly 40% year-over-year in 1Q2020. As a heads up, in Friday’s Breakfast Brief, I’ll look a bit more into some of the changes to the oilseed balance sheet in the May WASDE
May WASDE Surprises with Way More Wheat
For wheat, prices dropped as global carryout for the 2020/21 crop year came in way higher than expected.  The USDA said in their May WASDE report that total U.S. wheat production in the 2020/21 crop year should come in at 1.866B bushels (or 50.8 MMT if converting bushels into metric tonnes), which is about 3% lower year-over-year. Aligned with the drop in production and the appreciation of the U.S. Dollar, U.S. wheat exports are expected to drop 2% to 950M bushels (or 25.9 MMT). For Canada, total wheat production (including durum) is pegged at 34 MMT (+5% YoY) with exports of 24.5 MMT (+6.5% YoY). Compare this to Agriculture Canada’s April estimate of a 33.9 MMT harvest and exports of 23.9 MMT.
The USDA also pegged 2020/21 wheat production in Ukraine and Europe lower year-over-year with, with the latter estimated to see a 20% reduction in exports to 28.5 MMT (versus 35 MMT estimated in 2019/20). That said, good rains fell last week in areas of France and Germany that really needed a shot of moisture. Similarly, some good rains are forecasted for parts of the Black Sea, but there are doubts if these rains will be of help to a soft winter wheat crop that is a few weeks from being combined.
The most surprising wheat number for me in the May WASDE was from the Land Down Undaa. The USDA thinks that Australian wheat farmers and exporters are going to have a big 2020/21, with their estimates for these line items expected to climb nearly 60% and 80% higher compared to 2019/20. This means that Australian farmers will produce 24 MMT of wheat, and export 15 MMT of it, which is way higher than 2019/20’s harvest of 15.2 MMT and exports of 8.2 MMT. Ultimately, I think that the May WASDE estimate of Australia’s wheat production and export numbers are a bit high and could be drawn down over time.
Overall, the USDA put out the 2020/21 goalposts for us to now debate. Whether they’re right and we’re wrong, or vice versa, the bottom line is that there is more wheat and corn to go around this upcoming crop year. Of course, Mother Nature has the final say but managing risk exposure to these volatile grain markets is going to be an important area to focus on.
At 8:45 AM CST in the North American futures markets (*not cash prices*):
(all prices in dollars per bushel unless otherwise indicated)
$1 USD = $1.3943 CAD, $1 CAD = $0.7172 USD)
July Corn: -1.8¢ (-0.55%) at $3.205 USD or $4.509 CAD
July Soybeans: unchanged at $8.52 USD or $11.986 CAD
July Soybean Meal (per short ton): +$0.30 (+0.1%) to $293.10 USD or $412.32 CAD
July Soybean Oil (cents per lbs): +0.17¢ (+0.65%) to 26.43¢ USD or 37.18¢ CAD
July Oats: -0.5¢ (-0.15%) to $3.038 USD or $4.273 CAD
July Wheat (Chicago): -4.5¢ (-0.85%) to $5.10 USD or $7.175 CAD
July Wheat (Kansas City): -4.3¢ (-0.9%) at $4.65 USD or $6.541 CAD
July Wheat (Minneapolis): -3.3¢ (-0.6%) to $5.178 USD or $7.284 CAD
July Canola: +1.6¢ (+0.15%) to $10.723/bu / $472.80/MT CAD or $7.662/bu / $336.09/MT USD
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