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Impressive Grain Sales to China & Ethanol Industry in Need of Aid

Update for July 17th, 2020

The latest reports indicate that President Trump has told his aids that he does not want to escalate tensions any further with Beijing and has decided not to put additional sanctions on top Chinese officials for now. In addition to that positive report, news out of China today shows a better-than-expected second quarter. This is a major milestone and makes China the first major economy to come out of the contraction caused by the pandemic.

Since the reporting period ended the USDA has announced an additional 3.259 MMT of corn sales to China. Many in the trade believe there could be even more buying before they are done, perhaps 6 to 10 MMT. The Chinese domestic corn auctions are continuing to see high demand with recent corn sales reaching over $7.00 per bushel making U.S. corn quite attractive. China was also the top buyer of U.S. soybeans last week.

Recent extended forecast models indicate there is a possibility of widespread rainfall expected over most crop regions but there is still a lot of extreme heat in the outlooks. If the rains disappoint, the market may need to give more risk premium. On the other-hand traders are looking at the possibility of the national corn yield reaching over 180 bushels per acre if the Corn Belt receives adequate moisture and more moderate temps going forward. Another headline to watch is the recent ruling of a federal judge that has ordered a shut-down of the Dakota Access Pipeline. If this decision is not overturned it will likely cause issues for grain movement. During the winter of 2013-14 rail lines prioritized the shipment of crude oil at the expense of grain. This caused freight costs for to rise substantially which meant weaker basis values to producers. There is more rail capacity today than in 2014 but higher costs are still expected if the rail lines are overwhelmed by a pipeline shutdown.

The Renewable Fuels Association (RFA) is urging Congress to help support the U.S. ethanol industry in the next aid package. Recent data shows the industry has suffered Covid-19 losses of more than $3.4 billion in lost revenues so far and more is expected. The group estimates that pandemic-related damages could reach $7 billion in 2020 and an additional $1.8 billion in 2021. The RFA warns “If additional travel and business restrictions are adopted once again by states, the losses would be larger and may even surpass the $10 billion estimate from RFA’s initial forward-looking analysis released in April”. The group has determined that cumulative reductions to ethanol production and consumption amounts to over 1.3 billion gallons. This calculates out to nearly 500 million less bushels of corn used over the same period a year ago. CoBank does not expect the ethanol industry will rebound to pre-Covid-19 levels in 2021. Instead they anticipate a recovery of 80-90% of the pre-coronavirus levels. There is a lot of uncertainty now and new shut-downs like those imposed this week California will not help. CoBank believes that the resurgence of the virus and renewed activity restrictions will, “arguably reduce driving and fuel demand” once again.

The EPA has received 6 more requests from refiners for retroactive exemptions from the mandated use of biofuels according to the most recent data released by the agency. Each refinery submitted one new application for each year from 2011 through 2016 since the EPA’s last update on filings June 18th. These latest requests add an additional 27 waiver applications pending for 2019 and one for 2020, this brings total requests to 86.

Shown in the first map below are the predicted rainfall totals over the next 5 days. (Today through Wednesday)

Looking ahead to the 6-10 day outlooks temps are expected to trend hotter than normal for most of the country with slightly above precipitation in most of the Corn Belt.

The 8-14 day outlooks show a continuation of above-normal temps for most of the U.S. with below-normal precipitation expanding westward.

The weekly U.S. drought monitor shows a 3% increase of drought impacted areas across the entire country. Some of the key regions showing increases occurred in Iowa, Missouri, Indiana and Ohio.

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