The current state of grain prices
06.04.2020 (messenger-inquirer) - The University of Kentucky Extension Grain Marketing Specialist, Dr. Todd Davis, prepared the following discussion concerning the current state of grain commodity prices given the interaction of COVID-19 and declining oil prices.
The futures market reacts to facts and emotions. Emotion usually trumps facts in the very short term. The roller-coaster ride in 2020 is driven by the fear in the financial markets spilling into the commodity markets. At some point, the commodity markets will have to reconnect to the market fundamentals.
The 2019 corn and soybean crops are half-way through their marketing-year, and USDA typically provides minor adjustments throughout the remaining months of the marketing year. USDA’s monthly supply and demand reports for corn have made offsetting adjustments by increasing ethanol but reducing exports by the same amount.
The significant reduction in oil prices due to Saudi Arabia flooding the market and reduced consumer demand for gasoline amidst the COVID-19 crisis and other factors have decimated ethanol processing profitability. As a result, corn demand for ethanol will likely be trimmed throughout the rest of the marketing-year.
USDA increased old-crop soybean exports in anticipation of some increased purchases from China. South America typically dominates exports in the spring, but production uncertainty and logistical problems may support exports for a few more weeks.
Both corn and soybeans are competitively priced in the export market if China wants to fulfill its Phase 1 purchases. Better than projected corn and soybean exports may help offset reductions in domestic use.
Everyone should be expecting corn and soybean planted area to increase in 2020 from 2019 levels. The only real question is the amount of additional planted area. USDA projects corn area at 94 million acres while FAPRI at the University of Missouri projects corn area at 92.9 million acres for an increase of 4.3 and 3.2 million acres, respectively, from 2019. Allendale and Farm Futures surveys peg 2020 corn area at 94.6 and 96.4 million acres, respectively, for a 4.9 and 6.7 million acre increase.
Mother Nature will determine planted area; however, the 2020 corn crop could easily exceed 15.3 billion bushels assuming trend yields, which would be 1.6 billion bushels greater than the 2019 corn crop.
Similarly, the USDA and FAPRI project soybean area at 85 and 86.5 million acres, which would be an increase of 8.9 and 10.4 million acres, respectively, from 2019. Allendale and Farm Futures also expect increased soybean area at 83.7 and 82. 7 million acres, respectively, for an increase in the planted area of 7.6 and 6.6 million acres from 2019. The 2020 soybean crop could be 4.1 to 4.2 billion bushels, which would be 540 to 640 million bushels larger than the 2019 crop.
What about demand? The market will continue to focus on ethanol and exports. Ethanol demand will be improved if oil prices increase and if there is increased domestic demand for gasoline. The longer the country is stalled with fear and consumers are unable to consume, the greater the pain for ethanol.
Similarly, a strong U.S. dollar will be an export headwind once Southern American crops reach the market. A weak global economy may also reduce the demand for feed inputs provided by the U.S. in foreign markets.
In short, the corn and soybean markets are expected to increase ending stocks for the 2020-21 marketing year. The combination of harvested area, harvested yield, and total use will determine the extent of the increase in stocks.
Corn tends to have stronger market fundamentals than soybeans. China remains in the driver’s seat to determine the soybean market’s fate (along with Mother Nature’s hand in the size of the crop). Both markets have weaknesses, but corn appears stronger than soybeans at this time.
Ethanol will continue to struggle due to cheap oil, but increased gasoline demand from a robust summer-driving season will improve the ethanol outlook. Processors will still be challenged for profitable margins until the Saudi oil flood stops as the over-supply of oil has depressed unblended gasoline and ethanol prices. Exports are more complicated to forecast due to exchange rates and trade policies that are shifting supply chains. If the world does not slip into a deep recession, then the U.S. will be a reliable supplier of quality commodities as long as exchange rates are favorable. The longer the world economy is stagnant, the more damage done to demand.