USDA disappoints, grain prices go lower, analyst says

More downside expected through the next two weeks, analyst says.

I expected this week to be volatile and likely set a short-term top in the grain complex, primarily due to the supply/demand report that was expected to show a significant drop in end stocks for corn and soybeans. The report did not show that. Prices were not volatile, but it does look like we set a top.

USDA did not deliver the bullish numbers the trade was presuming were inevitable, and prices sold off as a result. Wheat and corn had an outside day lower on report day, and because corn had established a contract high before the report was released its outside day lower became a key reversal. Soybeans closed higher on that day, but they sold off the following day as both wheat and corn continued their selling.

Seasonally, there is a strong tendency for grains to put in a high in early February, often around the crop report. We clearly have that kind of price action this year, and that suggests we will likely see more downside through the next few weeks. 

Wheat tried to find some support late in the week on concerns of crop damage from the extreme cold temps bearing down on the Southern Plains, some of which has no snow cover. There may be some damage, but we won’t know the extent for several weeks, and the market is unlikely to stay supported for that long on just that fundamental issue.

More important to the wheat market in the near term are that world FOB offers are declining and support from corn has diminished after USDA’s lack of supply concern. Russian FOB offers this week hovered around $290/MT, down $9/MT from last week (down around $.25/bu). The onerous export tax imposed by the Russian government has succeeded in pushing their farmers to sell wheat, and exporters are putting out offers – and getting some business. 

World cash is unlikely to decline very much as the tax will keep Russian cash high, but it appears we have found a ceiling in cash price for now. As of June 1, their tax will increase to 70 euro/MT over $200/MT, which will force their offers higher and thus world prices higher. By then, we will know what our own crop looks like and have a good idea of the remaining Northern Hemisphere’s as well. 

Wheat export sales were a solid 635 TMT, much higher than the high end of estimates. Market year-to-date sales are at 23.2 MMT, up 1.2 MMT (+5%) over last year. Corn sales last week were 1.5 MMT; market year-to-date sales sit at 57.5 MMT, up a whopping 34 MMT over last year (+142%). Soybeans export sales last week were 984 TMT; market year-to-date sales are at 59.4 MMT, up 27 MMT over last year (+81%).

These huge demand bases are the main reason the grain complex is in such a strong bull market. This week’s sell-off won’t change the demand base or the tight supply of U.S. crops. If anything, the lack of concern over corn supplies could exacerbate the tightness, especially given the late planting of the Southern American second-season crop. 

I expect that the seasonal will keep prices in check/moving lower for the next few weeks, but as we get into winter wheat’s growing season and spring planting, I look for prices to resume their upward trend. 

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