Last week marked a milestone in the crop year with the release of the Department of Agriculture's April supply and demand update. The April report is traditionally not an event, incorporating necessary changes as indicated by quarterly inventory statistics, but it also marks the end of focus on previous crop years.
After spending about 12 months analyzing everything about the 2023-2024 crop, from acreage to weather and yield estimates that will impact supply, to year-over-year changes in demand, I are now starting to look ahead to what will happen in 2024-2025.
Many people have a love-hate relationship with the USDA, with some ignoring it completely and others treating it like it's gospel. I tend to fall somewhere in between. In my opinion, being aware of how aggregated the information provided by USDA is in helping you understand how it fits into the overall underlying story and impacts prices. Most important.
Looking ahead, the USDA's next major update is expected in May, when it conducts its first formal survey of supply and demand for new crops. This initial forecast uses updated acreage numbers released at the end of March and demand revisions from Outlook Forum numbers released in February to provide a starting point for new end-of-plant inventory ideas. You can
When most people look at USDA numbers, they assume that it has a huge influence on the direction of prices each month, and they are wrong. From time to time, there are game-changing events that can result in significant adjustments to acreage in both the March planting schedule and June final acreage numbers, primarily due to survey data. , but most of the other information provided can be supported or challenged by policy movements. spot market.
What I mean by this is that depending on what is happening in a particular region and its spread, we can read whether the supply is more or less than what is needed to meet the demand. basics The difference between the cash price paid for a trade and the price traded in the futures market. It is a function of local supply and demand and acts as an accelerator or brake in influencing grain movement.
A stronger basis means an improvement in static futures prices, and a lower basis means a sign that demand is being covered. The basis is seasonal, with the lowest value usually being paid during the peak harvest season in a particular region, as space is filled, buyers have to fill their needs, and unsold items have to work to find homes. Ground strength is traditionally seen when grain movement is slow, immediately after harvest, during planting, or during some type of weather threat.
cargo This is part of the basic calculation and has its own supply and demand economics that affect prices. Monitoring freight is helpful when gauging demand. Rising freight costs and tight supply are signs of strong grain movement. Taking it a step further, looking at the impact of freight rates on a base basis can be another indicator of market strength. If freight rates rise but the standards paid to sellers remain strong, end users are willing to accept increased costs to cover their needs, which is a sign of strong demand. Of course, a decrease in the amount you pay due to an increase in fares indicates that you may be full.
spread This will provide further insight into the actual state of the physical pipeline and whether USDA is on the right track. Similar to grounds, spreads can also help influence the pace of grain movement, but spreads tend to influence commercial decisions much more than the pace of grain movement, so farm storage locations One might argue that migration may need to be slightly exaggerated due to the increase in . of the grower.
Spreads can act to encourage storage of grain through increased carry costs (if a deferred board is trading higher than nearby boards) or to discourage storage of grain by not covering carry costs. . Carry costs tend to average 5 to 10 cents per bushel per month for grain, depending on the situation. Regarding interest costs and other market factors.
Widening spreads are considered bullish on prices, indicating more grain needs to be put into the pipeline to cover nearby demand. A decline in the spread, or the market's willingness to pay more money to remove bushels from the pipeline, indicates that there is more supply available than current demand needs.
By observing the previous month's spread, you can understand the short-term supply and demand situation, and by observing how the spread is acting overall, you can determine the overall outlook for long-term demand and supply. You can grasp the “feel” and attitude of the person.
The debate over who is right between CONAB and USDA got me thinking a lot about what the cash market has to say about crop size. Looking at the usage numbers published by Brazilian crushers and exporters and backed by last year's spectacular base collapse and surge in freight traffic, I think the USDA is closer to being accurate when it comes to last year's production. I completely believe that. Both said more beans were coming through the pipeline than they had ever seen.
There is still a large portion of the harvest season left, but as the harvest winds down, Brazil's physical market is moving almost in the opposite direction from a year ago, which gives me pause. Brazil's basis was at its worst at the start of the harvest as traders washed away old crop supplies to make room for new crops. Since bottoming out in late January, more than $1.60 below the U.S. price, prices have firmed more than $1, with the spread narrowing to 50 cents at the end of last week. Cargo values also never rose, with the bulk of the harvest being consumed at 10-20% below last year's payment levels, both of which mean less grain is moving through the pipeline than a year ago. It shows.
Fewer bushels coming through the pipeline is clearly not news, and even USDA's high estimate is still 7 milliton, or 254 million bushels, lower than last year's production estimate, but by how much less bushels? , will become clear only towards the end of the year. Let's take a look back at the year and see how the cash market performs over the coming months.
what else are you looking at
- The Middle East and the Black Sea continue to deteriorate from a geopolitical perspective. It's hard to keep up with day-to-day developments, but there are signs that Russia is stepping up attacks on Ukraine's infrastructure, which could result in a slowdown in Ukrainian export cargo. Over the weekend, Israel was able to thwart an attack by Iran, but not everyone felt warm or fuzzy at the declaration that it would retaliate.
- weather. Reforestation has begun in the Western Corn Belt, and there are reports of water accumulating in the Eastern Belt. It's still early, so no one should be too upset about the lack of progress until Mother's Day approaches.
- Chinese demand. Will we see them coming back to the market? Are you canceling Ukrainian corn or are you shipping it? Aggressive buying from China is needed to overcome recent resistance in corn and soybeans.
- External market movements and capital flows. It feels like the fund is just sitting there for as short a time as possible before a period of growth and asking the market to accept it one way or another. Can you see them move to cover? Will something happen in the external market that will push speculators back into the grain market?
As always, if you have any questions, please feel free to contact us. Have a nice week!
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On the date of publication, Angie Setzer did not have any positions (directly or indirectly) in any securities mentioned in this article. All information and data in this article is for informational purposes only. For more information, please see the Barchart Disclosure Policy here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
