Welch on Grain: Corn Demand Remains Strong; 15% of Crop Affected by Drought

    Corn pouring out of an auger during corn harvest. Photo: ©Debra L Ferguson Stock Photography

    Market Situation

    Crop Progress. The U.S. corn crop condition index slipped another 2 points this week to 357. The changes reported today were a 1% increase in the poor category and a 1% decrease in corn rated good. The average index for this week of the growing season is 365.

    A crop condition score below average at this critical point of the growing season raises questions about the yield potential of this year’s crop. USDA’s August crop report will contain a yield estimate based on field surveys, followed by the Pro Farmer Crop tour later in August.

    The list of major corn producing states with double digit ratings of poor and very poor combined grew to 9 this week (% change from last week): Colorado, 13% (-10%); Illinois, 11% (+0%), Indiana, 17% (-1%); Iowa, 10% (+2%), Kansas 13% (+4%), Nebraska, 14% (-1%); North Dakota, 25% (+2%), Ohio, 10% (+0%), and South Dakota, 39% (+2%).

    The portion of the U.S. corn crop impacted by some degree of drought has increased from 3% on June 27th to 15% in last week’s update. However, the percentages in severe drought or worse beyond the Dakotas is still relatively small: 1% in Iowa, 4% Nebraska, 28% South Dakota, 31% North Dakota, and 3% in Texas.

    Grain Use. U.S. ethanol production for the week of July 21st was 42.699 million gallons per day, 1% above last year and up 11% from the five-year average. For the year, ethanol production is running 4% above last year and 11% above average. The current rate of use matches closely with the latest grain for fuel numbers projected by USDA for the 2016/17 marketing year.

    Updates to USDA’s estimate of grain consuming animal units is positive for feed grain consumption. Increases in pork and poultry to record levels offset lower numbers in the cattle complex to push GCAUs to 96.836 million, up 1% from last year’s record high. Energy feed consumed per GCAU is also up about 1% to 3,933 pounds, inclusive of ddgs.

    As we approach the end of the 2016/17 marketing year, U.S. corn export sales are at 99.7% of the current year’s projection. Sales for the week of July 20 were 4 million bushels with only another 8 million needed until August 31 to reach the target for the year of 2.225 billion bushels.

    Grain Commentary

    Unable to display feed at this time.

    Outside Markets. The advance estimate of second quarter 2017 U.S. economic growth is an increase in GDP of 2.6%, up from 1.2% in the first quarter. All categories contributed to the increase led by higher consumer spending of $82 billion, business investment up $15 billion, government spending up $5 billion, and exports over imports up $7 billion.

    The consumer price index continues to show a declining level of inflation compared to this time a year ago. The all item index has declined since February from 2.7 percent to 1.6 percent. Energy prices are increasing at a slower rate as well; food price inflation was steady this month but has been on the rise.

    At the July meeting of the Federal Open Market Committee of the Federal Reserve, which concluded on Thursday, the Fed chose to leave the federal funds rate unchanged at the 1 to 1¼ percent range. As to future rate hikes, the statement from the Fed noted that the committee expects economic conditions “…will evolve in a manner that will warrant gradual increases in the federal funds rate”, with that decision based on upcoming economic data.

    Part of that data will be related to the employment situation with close attention paid to the July jobs report out this Friday.

    Marketing Strategies

    Seasonality. The seasonal price pattern for the December corn contract shows that prices tend to fall off after we know more about acres (June 30 Acreage report) and weather during the precipitation and temperature sensitive silking and tasseling stages (July).

    With dry conditions impacting major corn growing areas, yield concerns are propping up prices more so than we would see in a normal year, compounded by significantly fewer corn acres this year. Today’s closing price of 384¾ is just below the average closing price since January 1 of 390½.

    2017 Feed Grain Marketing Plan. I have reached my marketing plan objective of 60% priced by the end of July. I anticipate pricing another 20% around the time of the August crop report when yield prospects will be based on field observations.

    Using beginning stock and use numbers from USDA in my corn price model, the current futures price of 384 corresponds to an average U.S. corn yield of about 166 bushels per acre. That yield would be just below a straight trend line projection for 2017 of 167.9 bushels, which does not seem unreasonable given crop conditions that have been slightly and consistently below average this season.

    My expectations for downside price risk between now and harvest ride on the degree to which yield estimates start to come in above 166. Estimates below that yield number could provide another step higher for prices.

    Upcoming Reports/Events.
    August 10 – Crop Production and WASDE
    September – 18-20 Master Marketer, Castroville, Texas

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