Changes in expected US corn and soybean yields were the big news at the USDA Estimates of world agricultural supply and demand (Wasad) and Crop production The reports were released on Thursday, October 12. The lower yields reduced estimated available supplies and led to higher prices for both crops after the report was released. However, the soybean price reaction was much greater than that of corn. The report’s reaction is further evidence that market conditions vary by crop: the corn market is well supplied and corn prices are relatively low and stable. The soybean market remains tight with relatively high and variable prices. Going forward, the corn market offers sellers low near-term prices, but strong and relatively stable storage returns. The soybean market is more uncertain, especially as the situation with low water levels in the Mississippi River system critical to soybean export traffic resolves.
Relative changes in supply and price
The USDA’s National Agricultural Statistics Service (NASS) lowered its estimates for 2023 U.S. national average production for both corn and soybeans. Corn yield decreased by 0.8 bushels per acre from 173.8 bushels per acre expected in September to 173.0 bushels per acre. This was larger than the decline expected by analysts’ average forecast before the report, which was 173.5 bushels per acre. Likewise, NASS lowered its soybean production estimate from 50.1 to 49.6 bushels per acre or 0.5 bushels per acre. Analysts’ average forecast before the report for soybean yield was 49.9 bushels per acre. Estimates of the area planted and harvested did not change, so lower yields resulted in lower estimated production.
Total U.S. available supply, which equals the sum of initial inventories, production and imports, also fell in the October WASDE report. These supply changes were the result of significant revisions to both production and starting inventories to reflect data released on September 30.y Grain stocks a report. To compare the magnitude of reported supply shocks across crops, Figure 1 shows the percentage change in aggregate supply between the September and October reports. The total supply of corn fell by about one percent. For soybeans, total supply fell by about half a percent.
Corn and soybean futures prices rose in response to expectations of reduced available supply. On reporting day, the near-term December corn futures contract rose eight cents a bushel to $4.96 a bushel. November soybean futures rose about 38 cents per bushel to $12.90 per bushel. Both prices were shy of the psychologically significant levels of $5 per bushel for corn and $13 per bushel for soybeans.
Figure 1 compares the change in aggregate supply with observed changes in price. In percentage terms, the price of corn rose 1.6% while the price of soybeans rose 3.0%. Note that the decrease in available supply of soybeans was smaller than that for corn, but the price increase was greater. The report’s market reaction illustrates how price response is a function of market condition and how current market conditions differ significantly for corn and soybeans.
The balance of supply and demand and price volatility
Table 1 shows the full US commodity balance sheets for corn and soybeans for the 2023/24 marketing year. The previous month’s forecast and monthly changes are provided for reference. Along with the changes in total supply discussed above, USDA has made minor adjustments to projected commodity use in 2023/24 for both crops. Corn exports remain high compared to the 1.67 billion bushels of corn exports observed in the previous 2022/23 marketing year.
The overall status of each crop market is summarized in Table 1 by the stocks-to-use ratio given at the bottom of the table. The October report reduced the ratio of corn stocks to use in the United States from 15.4% to 14.7%. However, this level remains historically high, especially given that inventory-to-use ratios have fallen below 10% in the previous three marketing years. For soybeans, the stock-to-use ratio rose slightly in the October WASDE report, but the stock-to-use level – at about 5% – can be described as historically tight.
The economic theory of pricing storable goods suggests that there are two basic market conditions: 1) high inventories at low, stable prices and 2) low inventories at high, volatile prices. The reaction to last week’s report suggests that the corn market is in the former while the soybean market is in the latter. The price dynamics of new crop futures since the summer of 2023 confirm this idea. Figure 2 shows December 2023 corn futures and November 2023 soybean futures; Each represents the value of the crop at and after the current harvest. Since the sharp rise observed in late July, corn futures have traded in a narrow range between $4.70 and $5.00 per bushel. Soybeans showed much greater movement, ranging between $12.50 and $14.00 per bushel.
Note that having higher and more volatile prices in soybeans compared to corn does not predict upcoming price levels. It merely indicates that changes in soybean prices are likely to be relatively larger because soybean inventories are insufficient to mitigate the impact of future supply and demand shocks. Current inventories and price levels do not dictate what news will come about supply and demand; They are only informative about the nature of the price reaction.
As the US harvest season winds down, corn and soybean market fundamentals will be driven by news about global usage and supplies in South America (see Farmdoc daily October 17, 2022). We should continue to see a broader trading range for soybeans, which represents both an opportunity and a threat to farmers considering selling or storing post-harvest. Prospects for soybean exports look good, and barge prices on the Mississippi River have declined in the past two weeks. In contrast, significant increases are unlikely for corn. Corn futures bids show modest returns for post-harvest storage from both futures and basis heights. Corn and soybean sellers should choose a market condition that suits their risk preferences.
References
Janzen, J. “WASDE Conclusion: Corn and Soybeans are at a Turning Point.” Farmdoc daily (12):157, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, October 17, 2022.
Wright, Brian D. “The Economics of Grain Price Volatility.” Applied economic perspectives and policies 33, no. 1 (2011): 32-58.
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