U.S. Drought Intensifies & High Grain Prices Altering Global Trade Pathways
Update for April 30th, 2021
It’s a bit alarming to compare this week’s U.S. Drought maps to those from one month ago. Notice the further expansion and intensification of drought levels in many of our key crop production areas. Most alarming are the states of Minnesota, North and South Dakota and all of Iowa with the exception the SW and SE corners of the state. Over the past week areas of Oklahoma, Missouri, Illinois, Indiana, and Ohio received some rainfall that, in some cases, briefly delayed planting but by the looks of the maps below, rainfall amounts did not alleviate the overall dryness. Looking ahead at forecasts for the Corn Belt over the next week much of this region is expected to receive less than an inch in total rainfall with temps forecast to be above normal for the first few days of May followed by a return to cooler than normal temps.
The trade is also closely monitoring crop conditions in Brazil. Dryness continues across key growing regions there as well and crop stress is evident. 10-day forecasts for Brazilian corn production regions show few chances for precipitation and extended outlooks show no change in the pattern. Crop estimates in the country are now declining, with some new estimates as low as 100 MMT, this compares to the most recent USDA Brazilian corn crop estimates of 109 MMT from a few weeks ago.
The next USDA WASDE report will be released on May 12th. This will be our first opportunity to see the official balance sheets for the new crop season for both corn and soybeans. The agency will use the acreage estimates from the March planting intentions report coupled with trendline yield and expected demand numbers. We will also likely see adjustments made to both the old crop and global balance sheets. Keep in mind that we have 2 WASDE Supply and Demand reports (May 12th and June 10th) prior to the highly anticipated USDA Acreage and Grain Stocks Report on June 30th. Planting progress is going well for a vast majority of the country so it’s reasonable to assume that the USDA will be talking more acres not less in the upcoming reports. Kevin Van Trump from the Van Trump Report referred to this year’s Acreage and Grain Stocks Report on June 30th as “one for the ages”. There are so many factors driving this market right now it’s hard to guess what a change in any one of them could do to numbers and what kind of reaction it could trigger. He advises producers to manage the time left on the decision-making clock and map your plan out now, not later.
Successful Farming reported that on Tuesday, private exporters informed the USDA of 101,600 metric tons of corn sales for delivery to unknown destinations. Of this, 50,800 metric tons is for delivery yet this marketing year and the other half is for delivery during the 2021/2022 marketing year which will begin on September 1, 2021. Al Kluis of Kluis Advisors says that the huge rally we have seen in the grain market could signal the beginning of a possible “blowoff” top. Kluis told his customers, “The signal will be the day that prices open higher and close sharply lower. It’s not a question of if; it is a question of when. I am watching the Stats Canada report today. The trade expects a 1.8 million-acre increase in canola and 1.2 million acres less wheat. For the first time, every Canadian farmer may plant more canola than wheat.” What the trade expects vs what the USDA reports is key. Kluis explained, “Reviewing Monday, the rally in the grain market continues with corn gapping higher on Sunday night and then closing limit up. This pulled the soybean and wheat markets higher. The USDA Crop Progress report Monday showed corn planting at 17% complete, just below trade estimates and the five-year average. At the close on Monday, corn closed up the $0.25 limit, soybeans closed $0.29 higher and wheat closed $0.21 to $0.29 higher.”
Soybean traders are preparing for some strong headwinds in the coming days that could limit further upward price momentum for the time being for a few reasons:
South American soybeans are currently the main source for exports.
There are no weather concerns for the U.S. soybean crop, it’s still too early in the season.
Soybean meal is undervalued in relationship to current soybean prices.
There is no fresh news to discuss.
Some traders wonder if more soybean acres have already been planted than what is currently being reported.
Bloomberg reports that “Soaring Grain Prices Changing Global Trade Flows”. According to the article, the expenses involved with feeding the world’s chickens, pigs and cows is now so high it is altering the pathways in which grain typically moves around the globe. As U.S. grain prices have surged higher some companies like Perdue Farms Inc., a massive chicken producing company in America, has resorted to buying soybeans from our #1 rival, Brazil. The top poultry producer in Brazil, BRF SA has begun purchasing corn from Argentina and now several U.S. and Chinese feed makers have turned to using wheat as a major ingredient in their feed recipes. These important changes are indications of just how tight the global market has become. But yet several of the world’s top food companies say they believe that the rally is far from over. Brian Williams a senior vice president at Macquarie Group Ltd said, “The meat and chicken industries still have good margins, so higher prices are yet to curb their appetite. However, corn prices have risen enough that in some parts of the U.S. wheat is being dialed in.”
The first map shown illustrates the expected total precipitation for today through next Friday, May 7th.
U.S. temperature and precipitation trends compared to normal for May 5-9 are included in the following two maps.
