Even though the information is a few weeks old, we continue to hear chatter in the market surrounding the quarterly stocks data. The one point these numbers made was the large dislocation in inventory between not just states, but the West and East Corn Belts. It is not uncommon to see higher inventory in the West as production is larger, but the fact that a large volume is being held on-farm is surprising to some.
Another thought surrounding the latest stocks numbers on soybeans is that last years crop was possibly overestimated. While this is possible, it may not be that much of a factor in price discovery. Analysts who feel the soybean crop was smaller than reported believe production numbers were 50 million bushels, too large. This would be much more of a factor if not for the fact the even with this reduction to stocks, old crop carryout would still be over 300 mb.
Some analysts are already looking forward to the June stocks and acreage reports form the U.S. Department of Agriculture, and focusing on corn plantings. In the four more recent years acres have actually been little changed from one report to another. In the prior twelve years however, corn acres had a strong tendency of increasing from March to June, and in some years, by a sizable amount. The greatest was in 2007 with a 2.43 million acre increase.
We are starting to see more of an optimistic feel on new crop soybean values. Even with this large old crop carryout on soybeans, new crop yield will have to be trend or better to prevent a drawdown in stocks. This is especially the case for corn, where ending stocks are already expected to be lower on new crop than old. Given the fact there is very little risk premium in today’s market, this could easily make the market hypersensitive to any adverse weather forecast.
At the same time, one major concern with soybeans in today’s market is the slowing in global demand. Not only have U.S. soybean sales decreased recently, but those from all origination points. This is unusual, as normally South America is flooding the global market with cheap new crop soybeans at this time. The fact that much of the buying we have seen recently is from China and only for storage is a primary reason for the reduced demand, as these facilities are now filling to capacity.
The real issue in the soy complex may be in the meal industry. The U.S. has a large 4.9 million metric tons of unshipped soybean meal sales, and that is a concern. Given the spread between the U.S. and South America on meal, it is not out of the question that at least a portion of these sales will shift away from the U.S. Not only would this cause a reduction in soybean demand, but a build in product that could weigh on soybean basis from both sides.
We continue to see comparisons made between this marketing year and similar ones in history. The one this year is being closely compared to is the 2009-2010 year, especially on corn. Stocks to use on corn is very similar between that year and now, which has some economists predicting a cash corn average of $3.55 for this year. Another similarity between the two years is from a technical point of view that indicates a sideways pattern from now until much later in the marketing year.
A factor that is weighing on today’s market on a whole is the lack of a significant weather threat. While we continue to hear stories of planting delays in the Delta region, the fact that total corn production in this area is relatively small eliminates much of the story’s support. Parts of the main Corn Belt have received beneficial rains in the past week bringing an end to early drought talk in several areas.
The U.S. is in an El Nino weather pattern, and has been since last October. There are now forecasts that indicate the El Nino will last through next fall, which has only happened twice in the past 55 years. These were in the years of 1969 and in 1987.
In both of those years the U.S. experienced above trend yields, and is a primary reason for the lack of risk premium in today’s market.
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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