We are starting to see more of a division in the market between old and new crop contracts. Old crop supplies of both corn and soybeans remain adequate, even if we would see a slight increase to usage from current estimates. For new crop we are seeing more interest in corn, as there is very little risk premium in that commodity, and the global stocks to use is not as bearish as some analysts claim it to be. The same is not true on soybeans, where a large South American crop is expected to weigh on values in the foreseeable future.
More market attention is being placed on spring weather outlooks as we get closer to the upcoming planting season. Trade remains unconcerned with spring weather outlooks as most are calling for benign conditions to persist. These are being verified by forecasts for a 50 percent chance of the current El Nino continuing through summer. Historically, an El Nino is associated with favorable growing conditions across much of the United States. While this is true, at the same time, the first questionable weather outlook could easily cause active buying in the new crop contracts.
Some forecasters are already stating they believe the U.S. will face planting delays this year, primarily in the eastern Corn Belt. While there is a possibility of planting delays in that region, and in fact potentially the entire Corn Belt, it is too early for the market to respond from the speculation. Trade is well aware of how fast the U.S. can see its crops planted, and will be slow to react to such stories at this time.
One region of concern with weather is the Gulf though, where corn planting is well behind average, and some fields have not seen field work at all. Another is the Plains, where winterkill is being reported in wheat.
There are concerns in the market that the U.S. is overpriced on grains and soybeans. In recent weeks we have seen buyers pass on U.S. grains in favor of cheaper supplies from The European Union and Black Sea markets. We have also seen buyers show more interest in South American soybeans. The strong value of the U.S. dollar in the market is also encouraging sales from most countries competing with the U.S. for export business.
Another impact of a stronger dollar that is starting to be mentioned is its effect on foreign economies. The Brazilian Real has dropped in value at the same time the dollar has rallied. This could generate revenue that the Brazilian farmers were not counting on, and allow them to invest it in their operations. One of the biggest investments may be in land for soybean production, which is also the one that is most needed by the global market.
While a stronger dollar does increase the value that foreign countries will receive for their commodities, it does not mean sales have taken place. A strong dollar can also increase the cost of inputs for production, and have a negative impact on returns. This is especially the case in countries where currency values have eroded at the same time the dollar has rallied, such as in Brazil.
Some analysts believe soybean demand is being underestimated at the present time, but just as many feel the same way on production and stocks. This is especially true on new crop, where stocks will likely build again next year. Even if the U.S. would produce just a normal yielding crop, some analysts believe new crop ending stocks will approach 500 million bushels at the end of the new crop marketing year. Even those who are more bullish believe new crop ending stocks will hold above 300 mb.
This soybean supply and demand situation is not being limited to the U.S. Argentine farmers continue to withhold soybeans from the global market as they are worried over the state of the country’s economy. The high taxes that the Argentine government has imposed on soybean sales are also limiting movement at this time. As a result the Argentine government has announced that soybeans being stored need to be registered to better track inventory.
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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