Ratings vs Yields & Hot and Dry Outlooks
Update for July 22nd, 2020
Traders continue to debate U.S. corn yield and demand from China even with their recent record purchases. Every year we have the same debate on final yields, this year there are those that expect an average corn yield of +180 bushels per acre while others look for a final number closer to 175 bushels per acre. Five bushels per acre may sound like an insignificant difference but when you multiply that by the expected 84 million harvested acres this fall, it adds up to 420 million bushels. Traders that are anticipating the lower yield are looking at key corn production states like Illinois that have had less than ideal growing weather and could realistically see yields of 175 and lower. They also see the potential for Chinese corn purchases somewhere in the range of 6 to 10 MMT’s. Others believe that China has reached their quota and will soon be done buying corn and the USDA will need to make a reduction of their current estimate of corn used for ethanol. These traders also believe that Chinese buying will soon end and exports overall may move lower than earlier USDA estimates which would put pressure prices.
On Monday the USDA confirmed another purchase of 132,000 metric tons of soybeans to China. Many traders feel that this is just the start and that Chinese buyers could soon be in the market for even larger purchases of U.S. soybeans. Right now China is battling food inflation and persistent heavy rainfall which is causing major flooding disasters across the country. According to China’s Ministry of Water Resources the nation is experiencing its worst flooding in over 30 years. 35 rivers are sitting at record high levels and flood alerts have been issued for 443 rivers across the country. Southern China has seen the most flooding so far but rains are now beginning to move into central and eastern portions of the country. Red alerts have been issued for severe flooding along the Yangtze River, including the city of Wuhan where COVID-19 first emerged.
The USDA surprised the market Monday with their weekly crop conditions reports.
Traders had expected to see reductions in GD/EX ratings for both corn and soybeans this week but instead saw no change in corn and a 1% increase in soybeans. The GD/EX rating for corn remained at 69%, with 59% of the crop silking, 9% in dough stage both of which are running ahead of average. Knowing this we can then assume that over 50% of the U.S. crop was in the midst of the highly important pollination stage during the extreme heat last weekend, areas that did not receive adequate rainfall totals will likely see some yield drag. It’s interesting to compare GD/EX crop ratings from key corn states for this year when the USDA is forecasting a national yield of 180 bushels per acre, to the GD/EX ratings and final yield of 176.4 bushels per acre in 2018:
2020 rating 2018 rating
Indiana 59% 72%
Illinois 63% 80%
Ohio 43% 81%
Nebraska 66% 86%
Iowa 80% 78%
Minnesota 83% 77%
This data gives some strength to the argument that the USDA’s current estimate of 180 bushels per acre may be too optimistic. Crop tours will begin in August which will also provide us with some actual in-field data which will give us a better idea where the 2020 crop actually stands.
Congress returned to work Monday with hopes of passing another aid package before the end of the month. It has become clear over the past several weeks that the original package was not enough to accomplish all that is needed. House Democrats are now proposing spending levels near $3.5 trillion dollars in additional aid while the Senate Republicans and Trump Administration are looking at spending $1 trillion to $1.2 trillion dollars. There are other major issues Congress will need to work through as well. Here are just a few:
Who should qualify for another round of stimulus checks?
How much aid should be given to state and local governments?
Should the supplemental unemployment checks continue, and if so how much should it be?
Should there be limits on the liability businesses and schools can face from lawsuits as they begin to reopen? (Several hundred have already been filed)
Will this package find a way to cover the impact to agriculture (2020 crop) including the ethanol industry?
The pending package from the House does not contain any aid package for the financial impact caused to the 2020 crop. Some reports say that the Senate version may not either. Reuters reported that both U.S. Senator Chuck Grassley and Senator Joni Ernst (R-IA) are trying to add aid for the biofuels industry into the relief package. Grassley commented on the matter last Friday, “The long-term hope for ethanol though is directly related to the extent to which the economy picks up and people start driving”. If the industry does not receive the highly sought-after aid it would be a huge disappointment for the entire ag sector.
The debate continues regarding a possible boost for the USDA’s Commodity Credit Corporation. Some lawmakers are asking for the CCC cap to be raised to $50 billion dollars, Farm Bureau is requesting an increase to $68 billion. What little news there has been regarding agriculture’s inclusion in the new aid package indicates as though livestock producers will be favored once again. This time indemnity payments are included for producers that were forced to euthanize animals due to the backup in processing plants. A conservative think tank called Heritage does not want to see the USDA’s spending authority increased from the current $30 billion cap to $68 billion. The group says that turning all spending decisions over to the USDA could mean that only certain special interests would receive funding. The group argues that by giving total discretion for spending to the USDA, “would allow Congress to avoid making important choices, such as which agricultural commodities would be eligible for payments, which geographic regions would be covered, whether there should be payment limits, and about almost every detail of any future handout program”.
The Drought Monitor map from July 14th shows that almost the entire western half of Iowa is in some stage of drought. DTN reports that this is the first time since the widespread drought of 2012 that any part of Iowa has reached the severe drought stage. When this critical stage is reached there are typically, “crop or pasture losses likely; water shortages common; water restrictions imposed.” The counties shown within the circle on the map account for 6-7% of total corn acreage in Iowa, or 935,000 planted corn acres. Soil moisture from excess rainfall during the 2019 season has been used up with the drawdown which was accelerated by the July 16-18 heat wave. Since the first this of June this region has a rainfall deficit of nearly 4 inches.
DTN’s meteorologist Bryce Anderson explained that during excessively hot weather the approximate evapotranspiration rate can average 0.30 inches per day, meaning even an inch of rainfall does not help the crop for more than a few days under extreme conditions.
There is a great deal of agreement amongst weather prediction centers that the forecast for the U.S. for quite some time looks to be drier than normal . The National Weather Service recently released their outlook for August, September and October. They project a “significant chance for above normal temperatures across the country after what has already been a very hot year for much of the nation.” According to Michigan State climatologist Jeff Andresen, “That’s a problem, it’s already a problem in some portions of the Corn Belt”. The medium range forecast that takes us into August shows portions of the Midwest will remain unfavorably dry, southeastern and northwestern portions of the Midwest could see above normal precipitation.
The 6 to 10 day outlook shows the continuation of hotter than normal temps for the eastern 2/3rds of the nation with below normal precipitation expected from coast to coast.
Looking ahead at the 8 to 14 day outlook above normal temps are expected to expand further to the west with a couple of small pockets of above normal rainfall.
The map below shows the total expected precipitation for the U.S. compared to normal through August 4th.