Porto Alegre, July 4, 2023 – After forty days of regional drought in the US Midwest, the rains returned at the end of June and promise a moist July. The drought issue must still leave some track of losses, either in the area to be reaped or yield this season, which will be updated in due time in the next USDA reports. For US consulting companies, the planted area report of corn, which was always released on June 30, was not expected to have major changes. However, the numbers were far from any market estimate and, as always, the surprise leads to big movements on the CBOT. With this report, it was no different, with corn falling almost 7%.
There is a disturbing situation in the international market in the 2023 US crop: the analysis of crop conditions. USDA has aggressively cut crop conditions on a weekly basis, reaching only 50% in good to excellent crop conditions last week. In other words, the report points out that half of the crops are in fair to poor conditions.
Much of the Corn Belt region has received below-normal rainfall since the second week of May, and some locations, already experiencing difficulties in planting in the early spring, ended up suffering some loss of area and poor crop maintenance conditions while developing. Cracked ground never meant a crop failure in the Midwest. However, it seems the report was excessive by rating fair to poor crop conditions at 50% or the worst condition since 1988. USDA has included in its methodology the aid of satellite research mechanisms and mathematical models derived from this new system that tries to switch from an agronomic visual analysis to an automated digital one. We must remember that in the last seasons in which the satellite model started and generated companies dedicated to this mechanism, the crop estimates generated by these companies were never aligned with the final USDA figures. Now, with the Department using the agtech methodology, distortions may be emerging in traditional crop surveys. One of the risks is measuring crop conditions through the “color” present at the moment in satellite images. If there is any stress situation in which plants change color, the model diagnoses it as a problem and perhaps suggests a situation an agronomist would not evaluate in the same way.
This situation is so relevant that a week ago, when USDA cut 5 points in crop conditions, the night trading session of the CBOT operated sharply lower. The point is that the new methodology can generate false impressions about the crop situation and generate this type of movement in markets. One more very clear example: none of the companies with satellite-aided methodology projected the planted area close to the latest USDA numbers.
Rainfall in June was effectively below average and justifies market tensions over potential yield, although crops are not yet in the critical and defining phase of production. The rains in the last thirty days have improved. Rains are more concentrated in the production axis of the Midwest, mainly Illinois. This past weekend, rainfall reached the entire region with rates of 30 to 80 mm. Of course, this will not save the 2023 US crop, but it is a sign that the situation is not as bad as indicated and that, if the rains are back to normal in July, the US crop can still be good. Certainly not with the initial yields projected by USDA, but still good numbers. For this reason, July is fundamental for this definition of production, with crops entering the pollination and silking stages. The weather forecast for July is very good across the region.
While the market was very concentrated on the climate theme, the planted area report, always released on June 30, had a bias given by all US consulting companies and brokerages, including those based on satellites, of a slight reduction in the corn area from the March planting intentions. The area was estimated by USDA at 92 mln acres for corn and 87.5 mln for soybeans. Traders indicated 91.8 and 87.6, respectively, on average. But some estimated an area above 88 mln acres for soybeans and below 91.8 for corn.
This acreage number released on the 30th refers to the effective planting and not the estimate, but must have small adjustments until January. The report brought the corn acreage to 94.1 mln acres, the largest area since 2013 and the third-largest area in history. An area of this size took the market by surprise, as no US company had even foreseen a bias of area increase. For soybeans, the reversal of expectations was also strong, but, on the opposite side, as USDA brought an area much smaller than any estimate, of only 83.5 mln acres, 4 mln below the planting intentions and far lower than any indication from the private sector.
Now, the adjustments will take place in the July supply and demand report. This area will be adjusted in the production calculation. There is a doubt about the area to be reaped. Owing to the climatic situation, the area may be smaller than previously predicted and compensate for part of the larger planted area. The adjustment in the planted area could generate a record US production of 391 mln tons if the USDA’s initial yield projection of 181.5 bushels per acre is maintained. Owing to the crop condition report, be it right or wrong, USDA may be led to cut this projected yield perhaps to 177 bushels/acre. Owing to the resumption of rain and the fact that crops are not yet pollinated, a larger cut seems difficult. Even with this projected cut, production would still be 382 mln tons, enough to put stocks at 53/54 mln tons, the highest since 2018.
In the case of soybeans, the situation has become a little more complex. The planted area was very low and could generate the production of just over 117 mln tons, against the 123 mln initially projected. The yield of 51.5 bushels/acre may not change in July, as seasonally USDA only changes it in August. With sixty days still to define production, both corn and soybeans deserve close attention in terms of climate.
Prices on the CBOT had opposite reactions for the two commodities. The absence of forecasts for an increase in the area kept the market calm and focused on the weather. With a very strong area, all net long positions began to be dismantled in the case of corn, generating very strong pressure on prices. The fall of almost 7% sent the September contract to the low of USD 4.90 a bushel. Now, expectations are focused on the weather in July and the adjustments to be made by USDA in its supply and demand estimate in July. For soybeans, the situation has become more delicate, as the smaller area reduces the production potential to just over 117 mln tons, and there will be a need to ration demand or exports to adjust the situation. This can help premiums in Brazil.
Follow the Safras Agency on our website. Also follow us on our Instagram and Twitter and stay on top of the main agribusiness news!
Copyright 2023 – Grupo CMA