Disclaimer: While an investment in managed futures can help enhance returns and reduce risk, it can also do just the opposite and in fact result in further losses in a portfolio. In addition, studies conducted of managed futures as a whole may not be indicative of the performance of any individual CTA. The results of studies conducted in the past may not be indicative of current time periods.
This summer’s theme could well have been: How low can they go? The “they” was supply and demand. Unfortunately, the competition looked more like a cage match than a limbo contest. In that analogy the heavyweight match was certainly Prevent Plant (PP) versus African Swine Fever (ASF).
Two days ago, the USDA’s Chief Economist released the first ever mid-month update of the Farm Service Agency’s (FSA’s) reported acreage. It showed that there were 20 million acres in the U.S. that didn’t get planted this spring and that 4.8 million acres that the National Agricultural Statistical Service (NASS) reported as planted were actually cover crops that could not legally be harvested. Between their May and August reports the USDA reduced their estimate of the soybean crop by 470 million bushels (MB), and the corn crop by more than 1.1 billion bushels. The final estimates from last week’s Pro Farmer Midwest Crop Tour were down an additional 180 MB on soybeans and 650 MB on corn. That is a combined total reduction of 2.4 billion bushels for the two crops since May.
The offsets to those staggering losses have been ASF in soybeans and international competition in corn. ASF reached China last summer. In their mid-June 2018 WASDE report the USDA estimated that China’s final soybean imports for the 2017-18 crop year would be 97 million metric tons (MMT), and that for the 2018-19 crop year they were expected to increase to 103 MMT. At that point they hadn’t published their 2019-20 estimates, but private estimates were in the 108 MMT range. Six weeks later China officially confirmed that they had ASF in their northeast. Fourteen months later those estimates of 97, 103 and 108 MMT have become (or soon will become) 94, 82 and 82. That is a total demand reduction of 50 MMT between July 2018 and August 2020.
Corn consumption has also been hurt by the sharp reduction in Chinese feed demand. A leading research firm estimated earlier this week that China’s pork production will be down 40% which will lead to a reduction in feed demand of 37 MMT. That loss in feed demand will reduce corn demand by 23 MMT and soybean meal demand by 10 MMT. As large as that corn number is, international competition has played an even bigger role in cutting U.S. corn demand. For the March-August 2019 shipment period Brazil’s corn exports are 12.3 MMT higher than a year ago and Argentina’s are 8.8 MT higher, a combined total of 830 MB.
The correlation between South American exports and total U.S. usage is all too clear. Last fall the USDA projected 2018-19 corn usage at 15.15 billion bushels. The crop year ends this Saturday and we expect their final accounting to show actual demand ended a billion bushels below their October estimate. For the 2019-20 crop year the USDA showed total demand at just over 15 billion bushels in their February Agricultural Forum. Unfortunately, the U.S. has remained uncompetitive and new crop export sales are less than half of last year and the five-year average. They have steadily cut their demand numbers since February and we expect total usage to be just over 14 billion bushels in their September WASDE, making this the second consecutive year where we’ve cut corn demand by a billion bushels from the initial estimates.
After a quiet six months currencies are again having a significant impact on futures prices. The currencies of China, Brazil and Argentina are all at or near multi-year lows. Those three, along with the U.S., are the dominant players in world agricultural trade. South American farmers have received a financial windfall and are getting a strong price signal to increase their acreage this fall. For China, all imported products have become more expensive. That difficult combination has created additional downward pressure on our dollar-denominated futures contracts.
U.S. weather was extremely unkind this spring and it remains tremendously important. Not only did PP nearly double the previous record, but those crops that did get planted went in later than ever. Moderate temperatures and good August rains have been very helpful, but corn and soybeans face significant risks as they move toward maturity. The September forecast for the Midwest indicates below average temperatures and the crops are woefully short on heat units, measured as growing degree days (GDD). Based on their current maturity a meaningful percentage of the corn crop faces frost risk. Soybeans will shut down based on reduced daylight, but late planting and fewer GDD will both negatively impact pod filling. An earlier than normal frost in the Midwest would definitely settle the cage match in favor of higher prices.
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