Trade continues to show concern over recent corn demand. We did see a reduction to demand in the latest balance sheets of 60 million bushels, but analysts believe this was not enough.
Given recent export performance on corn these individuals claim corn demand should be reduced another 50 and possibly 75 mb. If correct, this would push corn carryout close to 2 billion bushels.
Analysts are not only questioning global corn demand, but the domestic side as well. The main number is feed usage which is projected at 5.3 bb.
Recent usage and seasonal tendencies indicate actual feed demand on corn is likely closer to 5.2 bb. At the same time, recent production indicates ethanol demand is too low by an equal amount.
The market is not only worried over corn demand this marketing year, but soybean demand as well.
Cumulative soybean exports were lowered by 25 mb in the latest supply and demand report and another reduction is likely.
Crush margins have greatly tightened in the U.S. and will likely reduce usage there as well.
The greatest concern in the soy complex is that we will see another build to reserves next year, and possibly top 800 mb.
The greatest unknown in the soy complex, and the one that could give the market the most support, is what is taking place in South America.
Both the USDA and sources in South America continue to predict a large soybean crop in those countries.
Even with weather losses it is likely we will see record SA soybean crops. What is even more worrisome is that soybean demand will falter from the world’s largest buyer, China.
The state of the global economy has been a long-standing negative factor for the commodity market.
The most talked about of these has been China and how that country’s stock market has collapsed.
The same is true in Brazil however, where the stock market recently traded to a seven-year low.
In China this has generated concerns over future commodity demand. For Brazil, the worry is that farmers will not receive financing to purchase needed inputs for next year’s crops.
Ethanol industry economics are currently under pressure, and outlooks do not show much improvement.
Ethanol margins are currently in the red by 5 cents per gallon, but actually decline further as the marketing year progresses. Blending rates are even more negative which is pressuring ethanol margins from the demand side as well.
Historically, ethanol margins have benefitted from cheap corn, but lately this has not favored the industry. This is from the fact energy values have traded to some of the lowest levels seen in many years.
A result of this is that fuels with higher blend rates of ethanol are not being retailed at a significant difference from low-blend rates. For example, E-85 ethanol is only holding a 10 percent cost advantage to E-10.
Economics indicate this spread needs to be closer to 25 percent to make up for the reduced efficiency that accompanies E-85.
We are also hearing concerns voiced over processing margins and profitability in the soy complex. Soybean crush margins are positive at the present time, but have declined considerably in recent weeks. This is mainly from concerns that we will see a build in distiller’s dried grain availability due to weak global demand.
Concerns are building across the U.S. surrounding the fact commodity values are under break-even for many producers.
While this is garnering more attention, in many cases, returns have been negative for the past two years. Producers have been using the profits generated from previous crops to cover this gap, but this source of revenue is starting to be depleted.
As a result, we may see higher borrowing this year than in recent history.
The most concern on these economics is high input costs. While we have seen a slight decrease to some inputs, others have actually risen.
Above all, the most attention when it comes to the cost of production is land values, primarily rent.
Rent values have not receded as much as expected this year and are the primary cause of negative returns in most cash flows.
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.
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