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Morning markets: Surprisingly big US crop decline lifts corn above $3.50

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Turnaround Tuesday – pah.

 

If the second session has a reputation among Chicago traders for reversing a strong trend in the first, corn futures set off with intent to bust that thinking this time.

 

The December corn contract stood 1.7% higher at $3.51 a bushel as of 10:15 UK time (04:15 Chicago time), extending gains of the last session, and taking gains so far this week to 3.1%.

 

This besides hitting a six-week high for the contract, and putting a gap in the chart too.

 

Ratings drop

Fuel for the gains came in data from the US Department of Agriculture overnight showing a surprisingly large week-on-week drop in its condition rating for US corn of 5 points, in terms of the proportion rated “good” or “excellent”.

 

That is not unprecedented - the drought year of 2012, for instance, saw 8-point and 9-point declines.

 

But it is unusual.

 

And, in cutting the good or excellent total to 64%, took a crop which had been raved as exceptional even into this month to one which is below the five-year average rating for the time of year of 66%, on Agrimoney calculations.

 

Worst-hit states

The reduced figure was in part down to a 9-point drop to 50% in the rating for top growing state Iowa, following the derecho high winds two weeks ago, and with growing dryness too.

 

However, while many investors had been prepared for further declines in the Iowa ratings, some other states saw hefty drops too.

 

The Michigan figure tumbled by 11 points to 54%, with USDA scouts noting that “crop conditions deteriorated throughout the week due to lack of much needed precipitation”.

 

And in Nebraska, the rating dropped by 7 points to 66%, as the state “runs out of water”, as Benson Quinn Commodities put it.

 

Yield implications

The fall in ratings does not spell disaster at all.

 

But it does appear to remove any last hope of the US harvest this year beating the record 15.0bn bushels set four years ago.

 

“Modelling latest conditions indicates a corn yield of 177.4 bushels per acre,” said Benson Quinn Commodities, comfortably below the figure of 181.8 bushels per acre that the USDA is factoring in – although only 0.1 bushels per acre below the estimate from last week’s Pro Farmer tour.

 

For soybeans - for which the USDA’s weekly crop rating sank by a more modest 3 points to 69%, compared with an investor expectation of a 2-point decline – the figure signalled a yield of 52.5 bushels per acre, bang in line with the Pro Farmer estimate.

 

“Great job there,” Benson Quinn Commodities said.

 

‘Not that tight’

Of course, it is not as if the US is now looking at tight corn, or soybean, supplies.

 

Factoring in the kind of numbers Pro Farmer was talking about corn carryout stocks from 2020-21 “would come in around 2.4bn bushels, which certainly is not as rough as something over 3.0bn bushels, but it is not that tight given our current economic situation”, said CHS Hedging.

 

Benson Quinn Commodities said that “US ethanol domestic demand and ethanol exports still a problem for corn bulls.

 

“Covid recovery sees continued drag on fuel usage and global exports of ethanol look iffy as Brazil looks to become more self-sufficient in the space limiting US exports in the coming year.”

 

‘Early seasonal price low?’

However, “an early seasonal low in corn prices looks more and more likely”, said Tobin Gorey at Commonwealth Bank of Australia, with increasing ideas that lows around $3.20 a bushel set early this month could represent the nadir for some months yet.

 

Soybeans, meanwhile gained 1.0% to $9.14 ½ a bushel for November delivery, supported by the weaker US crop rating, but also by residual hopes of further China demand.

 

As Commerzbank related, “a largely unannounced phone call took place between representatives of the Chinese and US governments yesterday” during which “both sides reiterated their commitment to the phase one deal signed at the beginning of the year.

 

“This renewed commitment to the trade agreement” as well as the reduced crop ratings are “driving up the prices of corn and soybeans”, the bank said.

 

Back above $300

Soymeal was the better performing product this time, adding 1.4% to $301.00 a short ton for December delivery, helped by ideas of a decline in exports from Argentina, the top shipper of the soy processing products.

 

“Argentina producers have been a reserved seller of soybeans and as a result, they are hanging onto a record amount,” said Terry Reilly at Futures International.

 

“It’s predicted Argentina’s soybean crush will decline over the next few months, resulting in lower meal and soybean oil exports.”

 

Gasc tender

Wheat futures, meanwhile, added 0.3% to $5.29 ½ a bushel in Chicago for December.

 

While the USDA Crop Progress report did not hold bullish factors for the complex, with spring wheat harvest preceding faster than expected and condition unexpectedly improving too, overnight wires did hold some positive news in terms of a further tender by Egypt’s Gasc grain authority.

 

… not that US origin is expected to win, of course.

 

Once again, the Black Sea origins should be retained,” said Agritel. And meaning really Russia and perhaps Ukraine, rather than even Romania, which has been sidelined by a small harvest from its usual strong position in Gasc tenders.

 

(Coceral on Monday pegged the Romania soft wheat crop at 6.60m tonnes, down 24% year on year.)

 

Reduced weather alerts

Still, US offers are back more in contention on world markets.

 

Monday’s price “falls are likely a significant step in the direction of restoring US competitiveness”, Mr Gorey said.

 

More negative for values is a turn more positive on the newsflow on weather.

 

Steve Freed at ADM Investor Services noted “word that weekend Australia and Brazil frost did not hurt wheat crops there”, besides expectations of rains for Argentina, where dryness has pressed crop development.

 

‘Bigger threat’

In New York, cotton futures for December gained 0.5% to 66.13 cents a pound, continuing to find some strength from worries over damage from two tropical storms this week, Marco and Laura.

 

In fact, Marco now looks like staying out to sea, rather than making landfall in Louisiana and heading into eastern Texas, as previously expected.

 

“Tropical Storm Laura, due to make landfall mid-week, is the bigger threat,” Mr Gorey said,

 

“And that threat has increased over the past day. Laura has moved further west,” he said, adding that “the main threat is heavy rain to some Texas and Delta cotton crops.”

 

That said, “the likely damage is modest given the crop’s development stage”.

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