Editor’s note: The following was written by Chad Hart, Iowa State University associate professor of economics, for the August Ag Decision Maker newsletter.
Crop price movements over the past few months have been volatile and often in opposite directions.
Drought and other global weather issues have pushed prices higher, but projected supplies remain high and usage has eased off slightly to relieve a lot of that price pressure. So the markets have bounced up and down, through several waves of information.
With each bounce, the price range has become a bit tighter. In May, the futures-based season average price for corn for 2021 soared as high as $6 per bushel and dropped as low as $4.80. In June, the range shrank to a dollar ($4.80 to $5.80). In July, the range was 60 cents ($4.90 to $5.50), with the majority of the month between $5.10 and $5.30 per bushel.
Soybean prices have followed a similar pattern. The highs have been pressed out as production estimates remain robust. The lows have moved up some as usage continues to hold through the higher prices of this summer.
While this pattern has provided more stable pricing over the past month, that stability could dissipate quickly. As we move toward harvest, there are a few critical factors to watch for signs of significant price shifts. On the supply side, the crop condition ratings can be a leading indicator. For the demand side, advance export sales often signal changes.
USDA’s weekly Crop Progress reports provide the crop condition ratings. These weekly grades for the crops are mostly based on a “windshield” inspection (how do the crops look as you travel around the countryside), but they do have a strong correlation with the final crop yields ultimately reported by the USDA.
For corn, this year’s ratings started off strong with the early planting push, but the drought quickly knocked those ratings down below the 5-year average. Starting in mid-June, the national corn crop had a “Good to Excellent” rating for roughly two-thirds of the crop. And that rating has slowly descended to 62% by the end of July, keeping it steadily but slightly below the 5-year average.
The 5-year average rating tends to drop a couple more points as we approach harvest, so we might see the same in 2021. However, traders will be watching to see if we get a similar rating shift to 2020. Last year, the drought did not fully show up in the ratings until late August and early September (weeks 33-35), when the 2020 crop went from being rated slightly above average to slightly below. The shift in ratings eventually paralleled a shift in the national corn yield, from the July estimate of 178.5 bushels per acre to the final estimate of 172 bushels per acre.
The storyline for soybeans is similar to corn. The first rating was high, based on early planting. But subsequent ratings were lower as the drought was factored in. Relative to the 5-year average, the 2021 crop has been holding steadily but slightly below average. And just like with corn, the concern is we could see another slide, like in 2020.
During August and September, the 5-year average rating drops only a point or two. In 2020, the decline was 10 points. If we get the same size decline this year, the rating moves from slightly below average to substantially below.
Based on historical relationships, each point swing of “Good to Excellent” rating translates to roughly a 0.2 bushels per acre change on the national soybean yield. So while the ratings have been fairly steady thus far, there could be additional market fireworks ahead.
Another weekly report from the USDA gives us frequent updates on the demand picture. The Foreign Ag Service publishes a weekly export sales report. It details the sales and shipments of ag products over the course of the marketing year. Within the report, FAS also tracks advance purchases by international buyers for the upcoming crops.
Soybeans started off the 2021 calendar with some large early purchases. By the time farmers were filling out their prospective planting surveys in March, international buyers, mainly China, had stepped up and purchased over 200 million bushels of soybeans.
However, that early surge did not last and sales fell back to a more usual pace throughout the spring and early summer.
It was during the latter half of last summer when soybean export sales took off and reached over a billion bushels before harvest. Currently, we are not seeing that same intensity this year. While USDA’s projections show a pullback in international demand for the 2021 crop, the outlook still points to a strong export year, the fourth largest ever. But the sales will need to start moving soon.
As soybean sales have slid below last year’s pace, corn sales continue to exceed last year. In 2020, the international surge began in July, with sales exceeding 700 million bushels by harvest. This year, the surge came in early May. Over a three week period, roughly 500 million bushels of corn were locked up for export, well ahead of normal sales patterns.
Chinese purchases represent the vast majority of the sales, with Mexico and Japan picking up much smaller amounts.
Since that surge, corn export sales have returned to a normal pacing throughout the summer. As with soybeans, 2021 corn exports are expected to be lighter than 2020 exports. However, 2021 is also still expected to be the second best export year ever.
For the past month, the crop ratings and the advance export sales have both followed their average patterns over time. The lack of movement in them has allowed price swings to dampen and price levels to settle towards the lower end of the range. Over the past three weeks, corn futures have pointed to a 2021/22 season-average price in the low $5 range, with soybeans coming in around $13 per bushel.
Continued stability in the crop ratings and advance sales will translate into a continued drifting of prices lower. However, if we see shifts similar to last year in either ratings or sales, it would reintroduce some upside potential for both markets.