As the 4th of July approached, the corn market was focusing its attention on USDA reports, the weather and also ethanol.
The reports that are garnering most of the attention are the final planted acreage report, the quarterly stocks report and the weekly crop progress reports. But at this time, the market is watching closely the fact that margins in ethanol are improving as the U.S. economy starts to open again.
“People are starting to drive more, so fuel consumption and miles driven is starting to rise,” said Frayne Olson, grain marketing economist at North Dakota State University.
“With the slowdown in ethanol plants that had been taking place, the amount of ethanol stocks have dropped. Although they’re still at pretty high levels, at least they’re dropping and heading in the right direction,” he continued.
“When we look at gross margins, the buy/sell margins, between buy corn/sell ethanol, that price differential is more positive,” he added. “I’m not saying that this will be a windfall for the ethanol industry or that everything is going back to the way it was, but they’re not bleeding as bad as they were before.”
Olson said there are a few ethanol plants coming back online. Some that have been producing at slower rates are starting to ramp up again, but others are unlikely to come back online.
“It looks as though the worst is over for the ethanol industry, at least in the short-term,” he said. “We’ll likely see some ethanol plants changing ownership. So things are improving, but they’re still not good. Fuel consumption is still below what we normally see this time of year.”
On June 30, USDA will release two reports – the final planted acreage report and the quarterly ending stocks report – which Olson feels will have a bigger impact on the corn market than on soybeans.
The final acreage report is a follow-up to the March Prospective Plantings report when farmers reported what they intended to plant. USDA followed up in June to ask what producers actually got planted. The reason that’s going to be important for corn, Olson noted, is because the surprise out of the March report was that farmers intended to plant 97 million acres of corn. That was higher than the marketplace was expecting and put kind of a negative tone in the corn market.
“Today’s viewpoint is that we didn’t plant 97 million acres. This June report will give us a much better indication of what was actually seeded,” he said. ‘We don’t expect 97 million acres, but we do expect that number to be cut. The question is, what’s the new number? How much of a reduction will we see? Did farmers make big cuts or did they just tweak things a little?
“That will have a big psychological impact on what traders are thinking about the size of the crop,” he added.
The quarterly stocks report will also be important for corn. Every quarter, USDA does a survey of farmers to find out how much inventory they have on-farm, which for corn, becomes really important. USDA also contacts all of the major grain handlers – the processors, ethanol plants, elevators, grain exporters and feed mills – and asks how much they have in inventory. This creates a breakdown of how much is in commercial storage versus how much is on-farm.
For corn, tracking usage is “really tricky,” according to Olson. “We know exports because we track that to the bushel and we have an idea then of how fast we’re moving corn into the national market.”
He explained that the Department of Energy tracks ethanol production every week to find out how many gallons of ethanol were produced and how many are in storage to determine how many bushels of corn are being used in the ethanol sector.
On the livestock feed side, he said it’s always hard to track feed consumption.
“Usually, USDA keeps track of how fast we are using the crop up, but feed usage is back-calculated,” he said. “With these quarterly stocks reports, we know how much is in inventory three months ago, and by looking at the current updated report, we can see the difference between those numbers and say, ‘Well, let’s adjust for exports, let’s adjust for ethanol usage, let’s adjust a little for industrial usage, and whatever is left over has to be feed usage.’
“The reason that becomes an issue is because some of the slaughter plants were shut down for a while and there’s this backlog on the meat side,” he explained. “There are a lot of animals, and in particular hogs, that were ready to hit the slaughter plant but the plant was shut down, and so now the farmers that own those hogs had to adjust rations and slow down the growth rates. A similar thing is happening on the beef side.
“So the question is, what does that do to our feed consumption? There’s some debate and discussion about the fact that the livestock sector has had problems and whether that increases feed consumption or decreases feed consumption. You can make an argument for both sides,” he said.
Two other things that will impact both corn and soybeans that traders, analysts and forecasters are all watching closely are the weather forecast and crop conditions. As the crops start to move into some of those critical time periods in July and August, Olson said people are doing their modeling and forecasting what kind of yield potential is out there.
“On the supply side of the equation, that’s the big focus – what’s the weather forecast, what’s the forecast for temperature, and what’s the general crop condition?” he said.
The weekly crop progress reports and crop condition ratings are about the only reference that a lot of the national and international traders have on what’s happening in each of the states, he explained.
“I know a lot of farmers question the numbers as far as condition ratings and what percentage of the crop is in good-to-excellent, but for a lot of the hardcore marketing guys that’s the only reference they have because they don’t have the contact or network with what’s actually happening on the ground,” he said.
Respondents or enumerators – the people that provide the information for the reports – are often county agents or county level FSA personnel. They will ask farmers what they’re seeing and whether there are problems developing and so on.
He cautioned producers not to look back years ago when crop conditions may have been similar and then expect that yield results will be the same this year. “That's kind of dangerous,” he said.
Even though there are folks out there, including academics, that try and do that, Olson wants to emphasize that it’s a very subjective rating. To really find out about what’s happening with your crop, he said the best way is to look at what happens crop condition-wise from week-to-week-to-week and determine if the crop is improving, slipping, getting worse or are there other concerns popping up.
On the demand side there’s a lot of focus back on China and the amount of purchases they’re making and whether they will fulfill the Phase One trade agreement. There’s a feeling throughout the country among many people who are saying the Chinese aren’t at the pace they, and the market, expected, Olson noted.
“One thing to remember is Chinese purchases of ag products, primarily soybeans, but also for corn and wheat, are very seasonal,” he said. “China doesn’t come in to buy large volumes of soybeans until close to harvest, and it’s the same thing with corn. When China was buying large volumes of corn, it was very seasonal. They tended to come in the August/September time period and started to ramp up purchases.”
Olson said he expects that, based on their past buying habits, China will be more aggressive with their purchases around mid-summer or later, in that August/September time frame.
There’s a bit of anxiety right now. Will China fulfill the targets that are in the agreement?
The general consensus is that there’s still some political turmoil surrounding it,” Olson said, adding that at this time both countries feel that China will meet their commitments.
“With that in context, they will have to start getting aggressive in buying U.S. ag products, which will include soybeans as there is a specific target for that,” he said. “There will also be some corn, sorghum, DDGs, and possibly some ethanol, which would be supportive to the corn market.”
Looking at local prices, at one local elevator in west central Minnesota regularly followed in this column, as of June 23, the July cash price for corn was $2.90 and basis was -35 cents under.
The October 2020 futures price was listed at $3.39 and the basis was -.04 cents under.