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A Tsunami of Bearish Headwinds

A Tsunami of Bearish Headwinds

The outlook for grain futures continues to be bearish!

By Devin Lashley Risk Management Intern
Photo Credit: Pexels Ramus Svinding

The grain futures market is currently facing a barrage of bearish headwinds, driven by several key factors that are aligning to suppress prices. Despite varying weather conditions across the U.S., the market remains indifferent, and recent USDA reports have failed to provide any relief. As a result, the outlook for grain futures continues to be bearish, with no immediate catalysts for a price increase.

The USDA's June acreage report was largely a non-starter. The report was bearish on corn as total 2024 U.S. acres came in above trade expectations, and corn stocks also came in higher by 123 million bushels providing no significant push needed to lift grain prices.

Farmers planted 91.5 million acres of corn and 86.1 million acres of soybeans, both slightly higher than the USDA's March forecast. This increase in acreage contributes to the bearish sentiment, as it suggests ample supply in the upcoming harvest season as a result of trendline yields. The market's reaction to the acreage report was muted, as it offered no bullish surprises that might have sparked a rally.

The quarterly Grain Stocks estimates, also released by the USDA, further reinforced the bearish outlook. Corn grain stocks on June 1 were reported at 4.99 billion bushels, and soybeans came in at 970 million bushels bearish for corn and neutral for soybeans. The higher stock levels indicate that there is more supply on farm than many had been forecasting. In fact, 61 percent of 2023 corn is still stored on farm up 37 percent vs. last year the highest since 1999 and 48 percent of soybean remained on U.S. farms largest since 2006 up 44 percent vs. last year as everyone was waiting for a rally that has yet not materialized.

Weather conditions across the U.S. have been mixed, with the west too wet and the east too dry, but the weather has yet not provided the weather scare this time of the year that we usually get. While southern areas are experiencing dryness and northern areas are too wet, the overall conditions are favorable enough to support healthy crop growth with crop conditions in both corn and soybean remaining above the 5-year average suggesting trendline yields.

There have been no significant weather disruptions yet that would cause a reduction in yields or create supply concerns. As a result, the market has not reacted to the weather news in a way that would benefit grain futures prices.

Additionally, global market dynamics are contributing to the bearish outlook. Egypt, the world's largest wheat buyer, is purchasing cheap Russian wheat at the lowest prices available. This sets a low-price benchmark for global grain markets, as Egypt's purchasing decisions influence worldwide buying prices. If American wheat is not as competitively priced, it is unlikely to find buyers in such a price-sensitive market, further dampening prospects for price increases.

A resurvey of acres in the North/Central U.S. where the 1000-year floods occurred for the August USDA crop report could see total planted and harvested aces come down as bushels and acres have been lost to flooding and downed areas and be price supportive. The current environment, characterized by ample supply and lackluster demand, points to sustained bearish sentiment in the near term as the funds have gone record short corn for this time of the year a first and a counter seasonal trend.

The heat dome expected over the U.S. Midwest for the 1st half of July where 50 percent of the U.S. corn heads into pollination has not materialized but some are forecasting for thew heat dome to set in in the 2nd half of July and first half of August impacting both corn and soybeans during their reproductive stage. However, the upcoming USDA July crop report on July 11th may be more of the same as the USDA could keep yields unchanged and kick the can down the road again as there is no real reason to move either way.

In summary, the USDA's June acreage report and quarterly Grain Stocks estimates have done little to inspire confidence or suggest an imminent price rally. Weather conditions, while varied, remain generally favorable for crop production, and global market dynamics are not in favor of higher prices. Yields and acres will need to come down in the coming months to get a relief rally and provide farmers a chance at higher profits.

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