Market attitudes changing
We are at a point in the marketing year where we start to see a change in trade attitude, mainly on corn. Trade tends to become less concerned on corn condition and ratings as some analysts consider the crop “made” by mid-August.
Trade also becomes more interested in harvest progress and actual yield numbers. Condition ratings will still play a part in price discovery on soybeans though, as the month of August is more critical in that crops yield.
Before long, we will see another change in the markets and price discovery. This will be a shift from supply and more towards demand. It is a well-known fact that the first quarter of the marketing year is usually the one with the greatest corn and soybean demand, especially for feed usage. What is concerning for some economists is the low demand we have seen on soybeans leading up to this point and speculation China has needs covered.
Trade continues to monitor the current El Nino weather system for any indication of how it could impact this years harvest season. It is not uncommon to see a wetter harvest season during an El Nino influenced year. The obvious concern with this situation would be possible harvest delays. Another could be slow maturity and the need for additional grain handling this fall, especially on corn.
Trade is starting to receive mixed indications on China’s corn situation. It is being reported that the Chinese government corn stocks grew by 83.3 million metric tons this year compared to 69 million tons a year ago. This brings the total volume of corn in China’s reserve program to a large 150 million metric tons. Very little of this corn is being used in China’s demand base though, as support pricing makes it unaffordable and quality is questionable at best.
There are other issues with China’s commodity market that are concerning to some economists. The primary one of these is China’s economy and how fragile it is. In the past month we have seen large drops in China’s financial markets are reports of some importers losing their credit to make purchases. With much of global trade being based on China’s demand, even the slightest downturn in the country’s economy will have a ripple effect through the world market.
We are starting to see expansion in Brazil that will greatly impact the global soybean market. Port expansion is underway in northern Brazil, with existing ports being improved and new ones being built. This will greatly reduce the cost Brazilian farmers need for their soybeans as freight will just be a fraction of what it currently is. This is a move that will likely lead to expanded soybean production in Brazil as well.
Improvements to world agricultural practices on a whole will continue to pressure the United States, not just those in South America. One of the greatest changes to world commodity production is the use of genetically modified seed. More mechanized farming in developing countries is also going to be beneficial to producing larger crops. As a result, the United States will likely continue to see its share of global grain trade diminish.
Trade is starting to pay more attention to the quality of the U.S. wheat crop and how much may be used for alternative purposes, mainly in place of corn. One of the most talked about at the present time is feed.
There are a large number of analysts who believe we will see a rise in wheat feeding this year due to elevated toxin levels.
There is also a chance of seeing wheat find its way in to other uses such as ethanol manufacturing. It is not out of the question that we could see enough corn demand slip away to negate any lower production number.
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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