Flash Drought and Record Export Sales
Update for August 28th, 2020
Some of the latest figures indicate that U.S. corn export sales are the best we have seen in 25 years with China accounting for 48% of all new crop sales with Chinese buyers continuing to signal further buying interest in U.S. corn. The declining condition of the U.S. corn crop and the weaker dollar are assisting commodity prices and are also convincing Fund traders to exit many of their short positions. Funds are currently holding their smallest net-short position since mid-March at only 71,000 contracts.
The U.S. soybean market is also seeing excellent export sales with new crop sales now the best of record. Purchases from China account for a massive 56% of new crop sales. Some new reports out of China indicate that the country is working to combat a major food inflation problem within the country which leaves them with no other choice than to continue to purchase U.S. supplies. Chinese President Xi has asked the citizens to do what they can to slow the acceleration of prices by beginning to conserve food where possible and limit waste. Many traders believe China will need to import 98 to 100 MMT of soybeans to meet their growing needs and Bloomberg reported on Wednesday that China plans to purchase record levels of soybeans before the end of the year, with perhaps +40% of those imports coming from the U.S. If this is realized China will have imported 25% more than the Phase 1 baseline year of 2017. We need to see those purchases to be made by early next year to outrun the record soybean production expected out of Brazil in 2021.
China continues to hold weekly corn auctions. Beginning on May 28th the country had sold 100% of all bushels offered each week until Thursday when “just” 89% of the 3.988 MMT of corn offered was purchased. The steep price point is believed to be the reason for the fall of in sales. These weekly auctions are expected to continue until October which is when deliveries of new crop corn from the U.S. should begin arriving and continue thru January.
Iowa ag economists are warning that 2021 is likely to be a challenging year for U.S. farmers. Big yields have been pressuring prices and current outlooks suggest input prices will be higher again this year adding issues for farm operating loans. During a webinar this week a group of Iowa State University Extension economists shared with viewers some positive news: China and the U.S. cannot do without each other. China has a limitless appetite for U.S. soybeans and our biggest buyer of U.S. ag products is expected to remain a very large customer. In addition U.S. corn and soybean exports have found new/renewed interest which is helping to move more of our products into many parts of the world.
We’ve been hearing for months about the possibility of an additional ag package. According to some sources, the aid will be coming but it’s unclear when. If the agreement is a “skinny” aid approach, ag relief wouldn’t arrive until later, sometime before November 3rd. USDA Secretary Sonny Perdue has said the agency is considering a CFAP 2 which would be offered soon after the Labor Day holiday. Funds for this program would come from the additional $14 billion allocated by Congress in the Coronavirus Aid and CARES Act which replenished the CCC account on July 1, 2020. White House Chief of Staff Mark Meadows said that he is not overly optimistic that a deal would come together soon as the two parties are unable to agree on the cost of a package. Once again the inaction we see is caused by political bickering between certain members of Congress. Meadows blames the Democrats for their lack of action on the matter and said President Trump is looking at using additional executive actions to help bridge the legislative gap.
EPA Administrator Andrew Wheeler said Wednesday that the agency has not made a decision on the biofuel blending requirements for 2021 or on the requests from refiners asking for exemptions from 2011-2018. The EPA is currently reviewing 67 such requests from refiners and has said that no decisions are likely before the November 30th deadline, citing impacts from the COVID-19 pandemic as the reason for the long delay.
I’ve included a lot of information from various sources regarding La Niña and drought outlooks in the past few week’s newsletters. What is happening right now across a large portion of the Corn Belt was not really on the radar screen until now. Summer temperatures have been through the roof from much of the Midwest which has drained soil moisture deep into the soil column and is now raising concerns of the development of a Flash Drought that could lead to major agricultural losses.
A Flash Drought is defined as a drought that generally occurs across the central U.S. during the warm season and develops very quickly over a short period of time. The development of this drought is caused by an assortment of abnormal conditions like unseasonably high temps, strong winds, low humidity and/or sunny days that cause unusually high rates of evaporation from the crops. Normal drought conditions can generally develop during any time of the year in any location, are usually closely linked with La Niña events and are mostly caused by a lack of precipitation.
We have seen several Flash Droughts in recent years including 2012 when over a 2 month period widespread portions of the central U.S. experienced between 3 to 5 category increases in drought severity. During that growing season locations that had near normal conditions present in late May had fallen into extreme drought conditions during July.
The U.S. Drought Monitor from August 18th, 2020 and June 2nd, 2020 are shown below to illustrate the advancement and intensification of drought conditions over the past 2 months.
Looking ahead at the 6-10 day outlook we see a cool down for a large section of the Upper U.S. and slightly above normal precipitation. The Corn Belt is not expected to receive any beneficial rainfall from hurricane Laura as earlier hoped.
The one month outlook for the month of September shows that the overall trend for below normal precipitation and warmer than normal temps are likely to prevail.