This past week marked a milestone in the crop year with the USDA’s April supply and demand update. The April report is traditionally a non-event, one that incorporates any changes needed if indicated by the quarterly stocks figure, but also one that marks the end of the focus on the old crop year.
After having spent nearly 12 months analyzing everything about the 2023-2024 crop, from acreage to weather and yield estimates impacting supply, to changes in year over year demand, we now start to look ahead to what 2024-2025 will bring.
Many have a love hate relationship with the USDA, some completely disregard all that they have to say, while others treat it as though it is gospel—I tend to fall somewhere in the middle. In my opinion, recognizing how much of the information the USDA provides is put together is paramount in understanding how it fits into the overall fundamental narrative and influences price.
Looking ahead the next major USDA update will come in May with the first official look at new crop supply and demand. This initial projection will use the updated acreage figures released at the end of March as well as any revisions to demand from the outlook forum numbers released in February, giving us a starting point for new crop ending stock ideas.
When looking at USDA figures, I think most folks go wrong in assuming they have a tremendous influence on price direction each month. While there are the occasional game changers, with major adjustments in acreage possible in both the March planting intentions and June final acre figures—mostly because they rely heavily on survey data—most of the other information provided can be supported or disputed by moves in the cash market.
What I mean when I say that, is we can get a read on whether supply is greater than or less than what is needed to meet demand by what is happening in basis and spreads in any given region. Basis is the difference between the cash price paid in a trade and where the futures market is trading. It is a function of local supply and demand and acts as an accelerator or brake when it comes to influencing the movement of grain.
A strengthening basis means an improvement in price with static futures, while a weakening basis is a sign demand is being covered. Basis is seasonal, with the weakest value typically paid at the height of harvest in any given area as space fills up, buyers cover their needs, and unsold bushels have to work to find a home. Strength in basis is traditionally seen at times when grain movement is slow, shortly after harvest, during planting or during any type of weather scare.
Freight is a part of the basis calculation and has its own set of supply and demand economics influencing price. Watching freight can be helpful when it comes to trying to gauge demand, with rising freight costs and tighter availability a sign of strong grain movement. Taking it one step further, watching the influence of freight on basis can be another indicator of market strength. If freight costs rise but basis paid to the seller remains strong, the end user is willing to eat increased costs to cover their needs, a sign of strong demand—while of course a reduction in values paid as freight rises shows bellies may be getting full.
Spreads provide further insight into the true situation in the physical pipeline and whether or not the USDA is on the right track. Like basis, spreads can help to influence the pace at which grain is moved, though one could argue with the increase in on-farm storage their moves may have to become a bit more exaggerated, as spreads tend to influence commercial decisions far more than those of a grower.
Spreads work to incentivize the storing of grain via increased carry costs (when the deferred boards are trading higher than the nearby) or discourage it by not covering the costs of carry, which in grains tends to average 5-10 cents per bushel per month depending on interest costs and other market factors.
Strengthening spreads are a sign more grain needs to be moved into the pipeline to cover nearby needs and is considered bullish to price. Weakening spreads, or the market working to pay more to keep bushels out of the pipeline says there is more supply available than current demand needs.
Watching front-month spreads can give us insight into the short-term supply and demand situation, while watching how spreads are acting across the board can give us insight into the overall ‘feel’ or attitude towards the long-term supply and demand outlook.
The conversation regarding who is right when it comes to CONAB or the USDA has had me thinking a lot about what the cash market is trying to say when it comes to crop size. I fully believe the USDA is closer to accurate when it comes to last year’s production, looking at the usage figures published by Brazilian crushers and exporters and supported by last year’s epic collapse in basis and spike in freight. Both say there were far more beans moving through the pipeline than ever seen before.
While we still have a significant amount of the crop year ahead of us, the moves in the Brazilian cash market as harvest works to wrap up are almost opposite that of a year ago, giving me pause. Basis in Brazil was the worst at the start of harvest as traders flushed old crop supplies to make room for new crop. Since values bottomed at the end of January at over $1.60 cheaper than US offers, we have seen them firm by over a dollar, cutting that spread to 50 cents at the end of last week. Freight values never spiked either, spending much of the harvest 10-20% below levels paid last year—both signs the amount of grain moving through the pipeline is less than that of a year ago.
Less bushels moving through the pipeline is not news obviously, with even the lofty USDA estimate still 7 mmt or 254 million bushels lower than its production estimate from last year, how many less bushels though, will really only become clear as we near the end of the year and see how the cash market operates over the next several months.
What Else I’m Watching
- The Middle East and Black Sea continue to deteriorate from a geopolitical standpoint. It is hard to keep up with the daily developments, but Russia has ramped up their attacks on Ukrainian infrastructure, with signs Ukrainian export loadings may slow as a result. Over the weekend Israel was able to thwart an attack by Iran, but their declaration they will retaliate does not make anyone feel warm or fuzzy.
- Weather. Planting has started in the Western Corn Belt, with reports of water standing in the Eastern Belt. It is early yet, with no one getting too shook up about a lack of progress until we get closer to Mother’s Day.
- Chinese demand. Are we going to see them come back into the market? Are they cancelling or are they shipping Ukrainian corn? We need to see active Chinese buying to help push us through recent resistance in corn and soybeans.
- Outside market moves and money flow. It feels like funds are just asking for the market to take it to them in some way by sitting as short as they are ahead of the growing season. Do we see them move to cover? Does something happen in the outside market that pushes speculators back into grains?
As always, please don’t hesitate to reach out with any questions. Have a great week!
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
