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February WASDE: Further South American cuts expected

Getty/iStockphoto Grain bins winter
Domestic grain demand adds bullish pressure to USDA reports, though easing Chinese grain demand could prevent a rally.

Historically, the February World Agricultural Supply and Demand Estimates report from USDA does not typically move market prices in a dramatic effect. Pre-report trade estimates suggest that the February 2022 WASDE is not likely to be a deviation from this norm.

But there are still several key factors that farmers should keep an eye on in Wednesday’s report, especially South American production and domestic corn and soybean stock volumes. Volatility has been about the only consistent factor moving prices so far this year and the new round of USDA data could add to the recent market upheaval.

Here is a rundown of the factors we will be watching for in Wednesday’s report. Our team will be covering the report’s release live, so keep an eye on our website, FarmFutures.com, or our social media platforms, @FarmFutures, for the latest insights and analysis of Wednesday’s reports.

USDA releases the reports at 11 a.m. CST on Wednesday, February 9. We look forward to seeing you then!

More cuts for South American corn, soybeans?

south american corn and soybean production

Amid untimely harvest rains and persistent drought conditions, the 2021/22 soybean and corn crop in Brazil and Argentina remains in limbo. Excessive rains have slowed soybean harvest progress in Brazil’s northern regions, while severe drought continues to hinder crop development in Argentina and Brazil’s center and south regions.

A mid-January 2022 USDA attaché report projected 2021/22 Brazilian soybean production just shy of 5.0 billion bushels. That figure is 110 million bushels (2%) lower than current USDA estimates of 5.1 billion bushels and could possibly be downgraded further in Wednesday’s report after weather issues intensified since the original attaché’s report was released three weeks ago.

The shortfall will likely tighten Brazil’s exportable supplies to 3.25 billion bushels, which if realized would be a significant downgrade from USDA’s current forecast of 3.45 billion bushels and would likely open the door to late season export opportunities for U.S. soy producers.

Expect supply forecasts for the Brazilian soybean market to remain tight for another year. With increasing domestic and international demand for soyoil, Brazilian and American soybeans are likely to remain a hot commodity for the foreseeable future.

Another USDA attaché report from the post in Brasilia released late last week estimated 2021/22 Brazilian corn production at 4.45 billion bushels, down 79 million bushels from USDA’s current forecast of 4.53 billion bushels on “disappointing first-crop corn volumes.” This increases the likelihood Wednesday’s WASDE report will show further cuts to Brazilian crop production.

Planting is already underway of Brazil’s second corn crop, with consultancy AgRural projecting that 24% of second corn crop acreage in the country’s center-south region has been sown, up from a meager 3% last year. But the dry weather could hinder crop development.

Brazil’s second corn crop accounts for 70%-75% of Brazil’s total corn production and is the primary source of Brazil’s exportable corn supplies.

Yet another USDA attaché based in Buenos Aires, Argentina estimates that the country’s 2021/22 corn harvest could be even lower than USDA’s current targets, suggesting that another cut to South American corn stocks may be in order in Wednesday’s report.

The post expects 2.01 billion bushels of corn will be harvested from Argentina in 2021/22, down 28 million bushels from USDA’s current forecast of 2.13 million bushels. The report cites persistently dry conditions as justification for the supply cut.

Trade guesses are even more conservative on cuts to South American crop production compared to attaché reports. If USDA’s estimates in Wednesday’s reports are largely in line with the recent attaché updates, I would expect to see prices moderate lower in the report’s aftermath.

Trading on optimism for lower stocks is not a sustainable strategy and if that’s all the recent rallies measure up to be, then expect bearish price action.

Green energy push to fuel tightening U.S. stocks

2021-22 U.S. ending stocks

Corn and soybeans stocks in the U.S. are likely to see the most significant shifts in usage in Wednesday’s reports. With supply estimates largely locked in after the January 2022 Crop Production and WASDE reports, focus this month will center exclusively on demand.

Average trade guesses peg 2021/22 corn ending stocks around 30 million bushels tighter than the January 2022 estimate. The national cattle inventory is down 2% on the year as of January 1. Even with the last three weeks of export volumes trending 18% higher than year ago volumes, marketing year today date corn export shipments remain over 2% lower than last year.

So all hope for bullish corn usage rates and tighter U.S. stocks will likely rest in the sole hands of USDA’s potential revisions for ethanol usage. Last week’s monthly Grains Processing report from USDA found a 4% monthly increase in corn consumption rates for ethanol production during December 2021.

The total December haul of 485.8 million bushels was the largest monthly corn usage volume for ethanol since December 2017. Corn marketing year-to-date weekly ethanol blending volumes by refiners are 8% higher than year ago values, though weekly volumes have exhibited a high degree of variability since the beginning of December 2021.

Ethanol stockpiles are also rising amid the runup in corn futures prices. Higher priced corn could scale back the recent ethanol boom, as cash prices around the Corn Belt have weakened over the past week. Reading between the report lines, ethanol will have to reconcile the bullish price run in corn against optimism in green energy, especially as the omicron variant of COVID-19 begins to wane and spring weather approaches.

Marketing year-to-date soybean export volumes are just over three quarters the volume of the same time last year, due in large part to dynamics with the South American crop. And while South American crop shortfalls have renewed Chinese buying interest in U.S. soybeans, the big story this month will likely be that of domestic soy crush volumes.

And what a story there is to tell. The December 2021 monthly crush soared to a record-breaking 198.2 million bushels, besting the previous high set in October 2021 of 196.9 million bushels. It seems increasingly likely that the extra 30 million of usage USDA will likely add in tomorrow’s reports will come directly from crush consumption for a couple key fundamental reasons.

Global soyoil stocks are at their tightest level since 1976 and with falling palm oil production and exports from top producers Malaysia and Indonesia, in addition to ongoing supply concerns about Ukraine’s behemoth sunflower oil supply amid threats of a Russian invasion. Plus, the rising demand for green energy has combined with these factors to create a bullish domestic market for U.S. soybeans.

Wheat stocks are slated to go unchanged in Wednesday’s WASDE report. Global wheat markets have enjoyed a resurgence in recent weeks as drought concerns in the U.S. and Russian invasion concerns in Ukraine create uncertainty in the marketplace. But domestic markets have few other options for revisions that would result in any fundamental price shifts.

World stocks hang in balance of South America

2021-22 World ending stocks

Global stocks are largely expected to shift on updates to South American grain and oilseed production, though any further adjustments to U.S. demand and Chinese grain import forecasts could generate some market movement.

Another USDA attaché report issued last week pegged 2021/22 Chinese corn imports at 787 million bushels, down an eye-popping 240 million bushels (23%) from USDA’s current estimate of 1.02 billion bushels of corn imports.

China’s 2021 corn harvest came in higher than expected, despite flooding in Northern China during harvest, where a large portion of the country’s corn crop is grown. Higher acres played a key role, especially since yields were slightly lower.

But keep in mind that China’s overall feed production will remain high through December 2022. The Beijing-based attaché expects Chinese imports of corn and sorghum “to remain at near record levels despite China’s tariff rate quotas remaining unchanged.”

And while last year’s supply tightness has largely eased in China’s northern regions, corn prices remain high in the South where alternative grains are being used to supplement feed rations. In sum, China will be less reliant on grain imports this year as its stock volumes finally moderate but domestic market fluctuations could send buyers to international shores in search of affordable corn.

With harvest largely wrapped up in the Southern Hemisphere and much of the winter crop in the Northern Hemisphere lying in dormancy, there is not a lot of new news in the wheat market that points to substantial changes in wheat.  

A late January 2022 USDA attaché report from Buenos Aires, Argentina projects 2021/22 Argentine wheat production at 801 million bushels, 47 million bushels (6%) higher than USDA’s current projections. So the wheat market could see some bearish price action as a result of a potential upward revision to Argentina’s supplies.

One other little discussed dynamic is the role of outside investors in the ag space. Commodities are widely regarded as a hedge against rising inflation. As the Federal Reserve prepares to implement its first interest rate hike in March and the pressure of rising prices continues to persist, speculators have flocked to ag commodities, especially soybeans, in recent weeks.

The presence of these speculative funds could increase price volatility after Wednesday’s reports.

USDA world production

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