The middle of January isn’t time for green shoots in the Midwest. But a pair of bullish surprises from USDA on Jan. 10 raised hopes the worst is over for a grain market fighting to find bottom after nearly four years of grinding relentlessly lower.
Smaller corn and soybean crops in 2024 could finally start to whittle down burdensome supplies that limited selling opportunities.
To be sure, noise from financial markets could still squelch the recovery. But fear of a new inflation threat appeared to be a positive force convincing traders and investors to take a second look at owning commodities as a hedge.
A few hours after the USDA bombshells dropped, the final jobs report of the Biden Administration also surprised. Some of the data came in much hotter than expected, raising the possibility the Federal Reserve may be in no rush to follow through with significant cuts to its benchmark for short-term interest rates. Betting on Federal Funds futures suggested rates could stay mostly steady until 2026, though predictions are a guess at best as President Trump begins a second term.
Will tariff threats prompt trading partners to bargain for deals? Or will this big stick instead fuel retaliation that builds with “tit for tat” penalties that squelch U.S. exports to key customers like China? The future is always murky, but this time the fog was thick indeed. And a faltering global economy could derail export opportunities regardless, if it weakens demand.
Interest rates soar
The Labor Department kicked off report day by raising the number of new jobs added in January to 256,000, some 100,000 more than expected, the biggest monthly gain in almost a year. Unemployment also ticked lower, falling by one-tenth of 1% to 4.1%. And hourly earnings grew as well.
Another report doused the heat a little, noting falling consumer sentiment amid expectations for inflation to keep moving higher. But on balance, investors pushed rates on the 10-year note past 4.75%, aiming toward the top of the range for the years since the 2008-09 financial crisis. Fundamentals suggest rates should be a percentage point or two lower, but fears of the Fed’s “pause” rule the day right now.
Higher rates hurt when growers look to finance land or longer-term equipment purchases. But they also affect investors’ appetite for risk, convincing money managers to clip coupons on the sidelines. Instead of gambling on individual securities, the “smart” money sought safe havens. Gold made a run at November highs near $2,800, despite a strong dollar buoyed by higher rates. This at a time when many other central banks around the world appear intent on cutting rates to stimulate their economies and avoid slipping further into recessionary territory.
Smaller crop lifts corn
Grains didn’t benefit from the Wall Street noise, consolidating until USDA’s final monthly total production update. Corn led the way.
First, the government lowered its estimate of harvested acres by 186,000, also taking 3.8 bushels per acre off yields, which still were a record 179.9 bpa. Total production fell 276 million bushels as a result, though that was still strong at 14.867 billion.
The production cut was enough to convince the government to also tweak its demand outlook, taking 75 million off industrial usage and exports. That trimmed expected carryover left at the end of the marketing year Aug. 31, 2025, by 198 million bushels. The 1.54-billion-bushel estimate represents less than a 40-day supply, below year ago levels. But such supply is still more burdensome than 2020-22 when prices were a buck or two higher.
USDA’s bottom line for the 2024 marketing campaign looks reasonable. My model only adds around 25 million bushels to projected ending stocks, which would take a couple pennies off the agency’s average cash price forecast of $4.25.
Assuming basis around 30 over nearbys, last week’s futures close at $4.70.5 offered a small premium. This allows some upside if the usual back and forth of futures prevails. The top third of the projected selling range would be $4.60 to $5.10, putting October 2023 highs in play above $5, but bypassing objectives above $5.70 from August 2023.
However, rallies could be elusive if exports or biofuel usage disappoints. Friday’s spike hit the top of the uptrending channel for the first five months of the marketing year as well as the deflated objective – if momentum stalls.
Changing the narrative over the winter could depend on the outcome of the big second crop being planted in Brazil. Dryness there is mostly limited to the northeast and southwest parts of the vast growing region.
$2 soybean upside?
Soybeans enjoyed an even more impressive technical boost from USDA. Fundamentals added support, though the government left its forecast for 2024 crop cash prices unchanged at $10.20 despite a cut in projected carryout from 470 million to 380 million bushels.
The reluctance of government economists to change price forecasts was understandable. Chinese officials already talked retaliation before Inauguration Day, ready to buy even more from Brazil and other suppliers. State firms are already doing that – shipments from the U.S. are off 3.2% from last year – diversifying sources amid a teetering Communist economy and slowing livestock and population growth.
The fate of biodiesel demand is also a question mark, worrying processors ready to mothball facilities they may not need anyway due to recent expansion projects.
If exports and crush hold firm, seasonal tendencies into U.S. planting could trigger rallies from $11.60 to $12.50, the top of the trading range during the 2024 calendar year. Crush margins recovered modestly from a steep post-harvest slump but are still off 40% of summer highs.
So are the corn and soybean cups half empty, or half full? That’s the never-ending debate for traders – and farmers too.