China, GMOs

Nearly 2 million tonnes of U.S. corn heading to China face stringent testing for an unapproved genetically modified variety after several cargoes were denied entry by state quarantine authorities, taking exporters and grain traders by surprise.

Since mid-November, China, the third biggest customer of U.S. corn, has turned away several cargoes and containers of corn that tested positive for Syngenta AG’s Agrisure Viptera as it has not been approved for import by China.

U.S. exporters had hoped Chinese officials would look the other way as the corn variety, also known as MIR 162, has been in the U.S. supply chain since 2011 and no cargoes had been rejected for containing the trait until this year, trade sources said.

MIR 162 has not been segregated from other corn varieties because approval by China appeared imminent and all other major buyers have approved its import, including Japan, South Korea, Russia and even the European Union, which is notoriously slow in approving GMO crop varieties.

Approval by China has been pending for more than two years. In addition to the nearly 2 million tonnes on boats headed to the mainland, China has another 3 million tonnes purchased that they have yet to ship.

Return to subsidies?

The U.S. government in recent years has not needed to prop up grain farmers’ income with subsidies, but those payments could come roaring back if the lower ethanol mandate proposed this month drives corn prices lower, as many analysts expect.

The likely change to the Renewable Fuel Standard comes as lawmakers are in the final stages of deliberations on a new five-year farm bill. The bill is expected to abolish a direct subsidy payment made to farmers, which costs about $2 billion a year, in favor of a system that guarantees crop revenue and offsets falling prices.

And if prices fall too far, those revenue support payments could spike. Corn prices have dropped as farmers this year produced a record large U.S. crop of almost 14 billion bushels.

The Environmental Protection Agency’s proposal to trim the amount of biofuels mixed into gasoline next year would be another blow. Season-low prices are typically set at harvest, after which values creep higher.

But some analysts fear prices could stay at these low levels for months.

“If we get good crops, we’re going to have way lower (market) prices and … then you’re looking at huge outlays,” agricultural economist Bruce Babcock of Iowa State University told Reuters. “To me, that is the more interesting result of ratcheting up these subsidies.”

From the U.S. Department of Agriculture to leading think tanks, experts foresee lower corn prices, in the mid-$4 range, for the rest of this decade – dramatically lower than the record $6.89 a bushel set by the drought-shortened 2012 crop.

The outlook assumes continued normal yields leading to bumper crops and ample, even burdensome, supplies. The EPA, in its annual rule making, has proposed a target of 15.21 billion gallons of biofuels use in 2014. A final decision will be made in the coming weeks.

Corn-based ethanol might account for 12.7 billion to 13.2 billion gallons of that, compared to this year’s mandate of 13.8 billion. A 56- pound bushel of corn yields about 2.8 gallons of ethanol.

The smaller ethanol guarantee could shave demand for U.S. corn by about 2 percent, or around 285 million bushels in the 2013/14 marketing year.

The reduction in usage by ethanol plants would be offset somewhat by smaller output of distillers dried grains, an ethanol co-product that competes with corn as a livestock feed.

Like Babcock, Patrick Westhoff, director of the think tank Food and Agricultural Policy Research Institute, said that lower ethanol demand would hurt corn prices, the end-product of which would be higher government payouts.

CORN ANALYSIS

Corn closed the week $.09 3/4 higher. Last week, private exporters reported sales of 165,750 metric tons of corn to Mexico.

Weekly export sales of corn showed a total of 23.4 million bushels. Total annual exports total of 1.024 billion bushels, are up 113 percent from last year and represent 73 percent of the USDA’s export.

Argentine corn planting advanced to 48 percent complete as of Nov. 28, up from 44 percent the week earlier, but remains significantly behind average of 73 percent.

The late start to planting given early dryness has been followed by heavy rains of late, which ultimately will likely prove beneficial, but are keeping activity slow at the moment.

The lack of farmer selling in December looks to at least mildly support corn as basis levels should remain firm without much country movement.

Ultimately, corn looks likely to fall into a trading range for the winter months with $3.87 downside price support and the upside limited until springtime, when the possibility exists for a weather related rally.

Strategy and outlook: Producers are 100 percent sold of 2013/14 crop. Producers are 10 percent sold of the 2014/15 crop.

SOYBEANS ANALYSIS

Soybeans closed the week $.11 lower from last week.

Last week, private exporters reported a sale of 111,000 mt of soybeans to China and 384,150 mt of soybeans sold to an unknown destination.

Weekly export sales of soybeans showed a total of 29.6 mb, and are the second lowest weekly total of the marketing year.

Total export sales of 1.381 bb are 95 percent of the USDA’s forecast through only 13 weeks of the marketing year.

Brazilian soybean planting continues to move along at an excellent pace, with 88 percent planted as of Nov. 28, up from 78 percent the previous week and compares to 85 percent average.

Argentina advanced to 54 percent complete, up 10 percent from the previous week and close to the average of 53 percent.

Weather looks nearly ideal in South America, but any stretch of adverse weather should send prices soaring. If this occurs, producers should look to sell remaining inventory levels and make 2014/15 sales.

There remains no incentive to storing soybeans this year with the market signaling prices are better now than expected next summer.

Strategy and outlook: Producers are 80 percent sold of the 2013/14 crop. Sell 10 percent at $13.53 and 10 percent at $13.74.

Producers are 10 percent sold of 2014/15 production. Sell 10 percent at $12.10.

This material has been prepared by a sales or trading employee or agent of Midwest Market Solutions and is, or is in the nature of, a solicitation. This material is not a research report prepared by Midwest Market Solution’s Research Department. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that Midwest Market Solutions believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such.

Brian Hoops can be reached at (605) 660-1155.