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A Perfect Storm for Bears in the Corn and Soybean Markets

The last three weeks have seen the gathering of a perfect storm that has plunged both corn and soybeans into a stubbornly persistent bear market.

It first began on June 30, when the USDA Quarterly Grain Stocks Report listed a 39 percent increase in total corn stocks over the same period in 2013, including a 48 percent increase in corn stocks stored on farms. The 2013-14 corn ending stocks were projected to hover near 1.25 billion.

In the same report, soybean ending stocks were estimated at nearly 405 million bushels, about 7 percent lower than levels on June 1, 2013.

Then, on July 11, USDA’s supply/demand report pegged the 2014 corn crop at 13.86 billion bushels, just 65 million bushels below last year’s level but revised 75 million bushels down from last month’s prediction, based on a record yield of 165.3 bushels per acre and projected harvested acres of 83.8 million acres.

It also predicted a record U.S. soybean yield of 45.2 bushels per acre in 2014 on a record 84.1 million acres to be harvested (June 30 USDA Acreage Report), for a total U.S. soybean production of 3.8 billion bushels in 2014. By comparison, total U.S. soybean production was less than 3.3 billion bushels in 2013.

Furthermore, this report showed significant increases in the projected ending stocks for both corn and soybeans by Sept. 1, 2015. USDA is projecting that 2014-15 corn ending stocks will rise to near 1.8 billion bushels by Sept. 1, 2015, which would be the largest corn carryover level in many years. Soybean ending stocks at the end of the 2014-15 marketing year were estimated at 415 million bushels, which would be among the highest levels ever.

Finally, on July 13, the USDA released its findings on the health of both corn and soybeans, observing that 67% of corn and 72% of soybeans were in top condition, a status for this time of the year not seen since 1994.

One day later, corn prices plummeted to a four-year low on the Chicago Board of Trade with the anticipation of another year of bumper crops, and corn futures for December delivery fell 1.7 percent to almost $3.8175 on the CBOT, after dipping to $3.7824, the lowest for a most active contract since July 28, 2010.

On the other hand, soybean futures for November delivery were unchanged at $10.8625 a bushel on the CBOT after prices advanced 1 percent, reversing a 10-day decline, the longest slump in 41 years.

Not everyone in the industry is entirely convinced of the accuracy of USDA projections, however. Jerry Gulke, president of the Gulke Group, suspects that estimates for planted corn acres, for example, may be inflated. Based on reported intentions to plant corn, gathered in the first two weeks of March and June, it is not clear whether record rainfall north of I-90 and in the Northeast significantly changed how much corn was actually planted. According to Gulke “We have few if any clients in North Dakota and Minnesota that actually planted their intended corn acres. Ditto for Michigan and Wisconsin”.

Many industry experts, including Gulke, also believe that the USDA has underestimated average corn yields. In fact, Darrell Good of the University of Illinois noted that the market price appears to be already factoring in an average yield of 170 bushels per acre, rather than the USDA’s official forecast of 165.3 bushels per acre.

Of course, the weather between now and harvest time will affect output for both corn and soybeans. Cold in the North could delay corn development and excess moisture has retarded the soybean crop to some extent, exposing it to greater losses if cold weather should arrive in August or September.

At this point in time, market prices, at least, already reflect a high degree of confidence that both corn and soybeans will enjoy a record yield this year. But given the myriad vagaries of both methodologies used in projections and unusual weather patterns, all eyes are now turned to the USDA’s August 12th report. Based on actual yield observations and failed acres, it will provide hard evidence which growers, consumers and markets can use to make better, more informed decisions.