May USDA Report

Someone told me they have felt like they are in a game of Jumanji this year. Things we had not even dreamed of keep jumping out at us from different directions every few days. It would be one thing if all this hit us after a good year, but this has all come after several tough ones in a row. I want to lead with that to say that you are not the only one who is going through this even though I know saying you are not alone does not help much. Knowing you are not alone may help a little.

Today was our first look at USDA’s projections for the new crop balance sheet. There was nothing major revealed today that shocked the market. The market expected a huge carryout projection for new crop corn and we got it at 3.3 billion bushels. New crop soybean carryout is down slightly for the crop now in the field compared to what we have in the bin and wheat carryout is also declining. World carryouts are projected to build in corn and wheat but decline in beans. USDA is very slow to adjust demand and we still have so many unknowns it is not surprising their estimates fell right in the middle of the trade expectations. Cotton was very bearish but seemed to be quickly dismissed by the trade. USDA projected big increases in both domestic and world carryouts in cotton and reduced US exports even though we have seen weekly announcements stay strong. I think cotton will see a significant correction on acres in June and I think that explains the market’s reaction to this bearish report.

Projections are tough in a normal year and we still need to see a start to the recovery in demand before we have a better idea of the slope of that recovery. We have priced in demand destruction over the past two months, now the market is trying to figure out how to price the recovery. This market has left many people shellshocked. More than a few farmers are still sitting on old crop corn and have very little new corn sold and now feel paralyzed. The next 48 days are going to be very important in the corn market. In a normal growing season, we put our highs in before the June 30th final acreage comes out and then drift to a harvest low in the fall if there are no major threats to the crop late in the growing season.

Everything is not negative. There are some positives out here if we look. One positive is modes of transportation when people start traveling again. There is going to be a lot of pent up demand to travel and I doubt people are going to be quick to embrace public transportation. Airplanes, busses and subways do not burn much ethanol. The rebound in gas demand may exceed expectations when we start the recovery. China is also building back their hog herds as rapidly as possible. Their government knows the power of hungry people and the communist party has no desire to cede any control to a mob. They are rebuilding their herds in vertically integrated biosecure facilities that feed balanced ration not backyard operations feeding table scraps. This is very positive for long term demand. They are currently exporting every bushel humanly possible from South America and still having to sell state reserves to meet their domestic demand. There is a great deal of geopolitical positioning by the US and other countries but we do have some additional leverage now, the key will be not to overplay it and do more damage to relations. Escalating trade tensions or a reignition of the trade war would be very negative to the whole world economy at a very delicate time.