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KARL SETZER
July 14, 2017

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June 2017 is going to go down as one of the driest in history in some regions of the United States. Even with widespread rains to finish out June, many locations saw 70 percent or less of their normal precipitation during the month. History shows that in many years with a dry June, corn production falls short of trend by an average of 7 percent.

Even though rains have been sparse across parts of the Corn Belt, the market has not reacted as much as some analysts had thought it should. This is because rainfall reports do not account for irrigation. While this will not recharge soil moisture, it will provide great benefits to a developing crop. Another factor is the increased planting of genetically modified crops, which have proven to be drought resilient in many cases.

Now that the calendar has turned to July, more interest will be placed on potential corn yield. For the most part, analysts are predicting a national corn yield average of 168 bushels per acre. While this would be down considerably from a year ago, it would still be high enough to maintain a 2 bullion bu carryout. This is especially true with the 1 million greater planted acreage figure than what trade has been using in balance sheets.

We are again seeing crop ratings used to try and determine final yield, which history has proven to be very unreliable, especially in soybeans. In 2015 the U.S. soybean crop rating declined 7 points during the month of July, and then bounced from 61 percent to 64 percent good/excellent. While everyone thought soybean yield would be poor, actual yield was record sized at 48 bushels per acre. While a record yield is not expected this year, the crop is far from a total loss as well.

Trade is also very interested in what we see for soybean ending stocks this year. It is thought soybean reserves will be well above those of a year ago at the end of the marketing year. What is concerning for this is that global stocks are also much higher due to elevated production in both the U.S. and South America. The addition of acres this production season will only compound this problem as we move forward.

One unknown factor in soybean balance sheets at this time is crush. Soybean crush has been lowered in recent supply and demand reports, and some analysts feel this has been over-done. This is coming from short-falls in other protein based meals, mainly canola, which could elevate demand for U.S. soy meal. The other side of this is how much meal demand may be off-set with distiller grain usage as stocks of that product are rising.

While some corn uses are being questioned, one that is running strong is ethanol demand. The U.S. ethanol industry consumed 452.4 million bu of corn in the month of May. This compares to 440.8 million bu in April and the 425.7 million bu of usage in May of 2016. Along with the elevated corn usage came increased distiller grain production as well. DDG output in May totaled 1.9 million tons compared to 1.85 million tons last May.

Trade is already looking forward to next year's production in Brazil. Corn values in Brazil are currently under the cost of production. Not only is this adding reason to the hesitation to sell any more bushels now, but it could deter new crop plantings. The fact not many new crop corn inputs have been booked are verifying beliefs that next year's corn plantings will likely be down.

Mexican officials have announced plans to increase ethanol usage in the country. One way is by increasing the blending rate to 10 percent, similar to the United States and Canada. Another is by pushing for expanded use of ethanol into some of Mexico's larger cities. These changes would take time to put in place, but could end up being a great benefit to the U.S. ethanol export market.

For several months we have heard how China is promoting the use of domestic corn to cut stocks, mainly in the ethanol industry. This appears to be working, as China has now turned from an ethanol importer into an exporter. While not a tremendous amount of ethanol is being exported at this time, the volume is expected to grow. It is still unknown as to what impact this will have on the U.S. ethanol industry, but there is little doubt it will generate at least some competition.

For the past several years the United States has seen continual growth in GMO grain and soybean production. This is expected to change this year though according to a recent farmer survey. Of the producers questioned, many claim they will reduce GMO corn acres in an effort to lower input costs. Farmers polled claim they will seed 67 percent of their corn acres to GMO seed, down from 71 percent a year ago. Total GMO acres is also forecast to decline by 4 percent for the same reason.

Karl Setzer is a commodity trading advisor/market analyst based in the West Bend office of MaxYield Cooperative. He can be reached at (800) 383-0003.

The opinions and views in this commentary are solely those of Karl Setzer. Data used for this commentary obtained from various sources believed to be accurate. This commentary is intended for informational purposes only and is not intended for developing specific commodity trading strategies. Any and all risk involved with commodity trading should be determined before establishing a futures position.

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