THE US corn story continues to be the primary driver of global grain markets at the moment, despite the improved planting conditions through the corn belt over the past 10 days.
Corn futures rallied in each session last week. The July contract set a fresh five year high on Friday, after the weather forecast turned wet again for the rest of the month, putting further summer crop planting in jeopardy.
Non-stop rain has plagued the corn belt this spring. Farmers entered the month of June with planting progress at its slowest pace in nearly four decades. According to the five-year average, the entire corn crop should be in and out of the ground by mid-June.
For many farmers, further wet weather will mean it will be too late to plant the balance of their corn crop as the production risk is simply too high. US agronomists are reporting that the yield penalty for corn planted after June 10 is around 20 per cent, after June 20 it rises to 40pc, and after June 30 it is at least 60pc.
Some growers are switching to soybeans, but it still has to dry out before they can be planted as well. The soybean seeding program has not been immune from the extremely wet spring, but the planting window closes a little later giving farmers an alternative crop option. Other growers are choosing the "prevent plant" insurance option.
The US Department of Agriculture released its latest World Agricultural Supply and Demand Estimates last week, and they took a knife to both the corn area and the corn yield. The expected final planted area was cut by 3 million acres (1.21 million hectares) to 89.8m acres (36.3m ha).
The USDA is traditionally quite conservative with their June estimates, but the severity of the situation this season compelled the agency to make the drastic cuts this month.
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However, the biggest surprise to the market was the projected yield of 166 bushels/acre (10.42 tonnes/hectare), a decrease of 10 bushels/acre (0.63t/ha) compared to the May estimate. The USDA is traditionally quite conservative with their June estimates, but the severity of the situation this season compelled the agency to make the drastic cuts this month.
The reduction to both area and yield means that US corn production is down a whopping 1.35 billion bushels, or 34.3 million tonnes, compared to May. This has resulted in a massive decrease in the projected 2019-20 US ending stocks to 1.68 billion bushels (105mt), down from 2.49 billion bushels (156mt) in May.
Nevertheless, based on the area yet to be planted, the condition and progress of the crop that has been planted, and the current weather forecast for the rest of June, this is unlikely to be the last production cut we see before harvest.
The higher prices are already eroding US corn demand, which is precisely what the market needs to accomplish. In last week's WASDE report, the USDA increased the use of wheat in feed rations by 50 million bushels (1.36mt) to 140 million bushels (3.81mt), all at the expense of corn.
The recent rally in corn futures is more about reallocation of domestic US production as opposed to a broader global issue. Corn production and stocks are still healthy outside of the US with both Argentinian and Russian production increased by 1mt. While it will not have a significant impact on global trade, the escalating African Swine Flu epidemic is taking a swag of corn demand out of the Chinese balance sheet.
With the market focused on the delayed US summer crop planting program, the US winter wheat harvest has commenced, amid very little fanfare, with the headers now rolling in the southern states of Texas and Oklahoma.
The wet spring conditions have delayed the ripening of the winter crops in all states, and there are undoubtedly quality and yield loss concerns in the regions worst hit by the spring deluge. That said, there will be pockets that will have benefited, particularly from a yield viewpoint.
Harvest has also commenced in the southern reaches of Russia and Ukraine, but it is very early days, and there are no reports on progress or quality at this stage. Global wheat consumers are short, and they are anxiously awaiting some Black Sea harvest pressure to reverse the recent upward trend in futures values.
The USDA has forecast world wheat production at a record 780.83mt, up 3.34mt on last month's forecast. This is almost 19mt more than the previous record of 761.9mt, produced in the 2017-18 season. The movers were Russia and Ukraine, each up by 1mt despite reports of dryness over the last month, and India which was up 1.2mt.
Canadian wheat production was left unchanged despite Prairie producers squawking about dryness and sub-trend line yields. European Union production also remained unchanged despite recent reports of lower production due to excessive rain in parts of France and ongoing dryness in central and eastern Europe.
Australian production was pegged at 22.5mt, a fair estimate considering the state of the crop at this early stage of the season. Rains over the past week see Western Australia, South Australia and Victoria all in an excellent position to achieve a minimum of average yields and are on track to produce an exportable surplus.
NSW is a different story. Only the southern portion of the state has had a reasonable start to the season, and most of the crop is now planted. Central and northern NSW are still in a severe drought, and substantial rainfall is required before there is any hope of a significant increase in the planted area.
It is a tale of two stories in Queensland as well. Central Queensland has had good rains, most of the crop has been planted, and prospects are looking good after a couple of bad years. On the other hand, southern Queensland is struggling, and much of the winter crop is yet to be planted due to the ongoing drought.
This is the third winter in a row of below average rainfall and production in that part of the state. Each of these winters has followed a summer of well below average rainfall and production. This region is the biggest domestic demand point in the country, and the bins are bare. Almost all of the demand is being satisfied with interstate shipments.
With another poor winter crop, the supply deficit in southern Queensland and northern NSW now looks likely to continue through to the end of 2020. A tremendous amount of rain is required to turn that around in a region that has a distinctly summer dominant rainfall pattern. Even a large sorghum crop this summer will struggle to alleviate the situation.
The domestic consumer in that part of the world is undoubtedly praying for rain. If it doesn't fall in the drought-ravaged parts of NSW and Queensland, they want to ensure that there is an exportable surplus out of the south and west of the country. That way, their input costs are pegged to export parity, which may be the best scenario they can hope for in a year of record global production.
