Today’s market is becoming more of a hand-to-mouth market than we have been used to seeing.
Corn and soybean processors have little if any reason to extend coverage at this time given the volume of inventory still being held in the country.
This has caused even more volatility in the cash market than just a year ago. Importing countries have also shown less interest in forward contracting for the same reason.
An industry that is focused on running this way is ethanol production. Ethanol margins have slid to a point where plants report being break-even at best, with the majority in the red.
As a result, many have slowed their process to reduce their losses. Ethanol margins are currently at the point where the by-products such as distiller’s dried grains are more profitable than the fuel itself.
There are indications that Chinese soybean demand is currently being underestimated.
The USDA is using an 80.5 million metric ton Chinese soybean demand figure in world balance sheets. Given recent demand it is quite likely this will be closer to 83 or even 85 million metric tons.
This may not benefit the United States though, as China is already booking soybeans from South America.
The main concern with Chinese soybean demand is that import growth has simply slowed in recent years.
Data indicates China will import from 4 percent to 8 percent more soybeans this marketing year than last.
What is concerning about this number is that the increase is not what the world market is used to seeing.
In the 2014/15 marketing year Chinese soybean imports increased 10 percent from the previous year, and the 2013/14 year imports were up 18 percent.
Some analysts are wondering how long the mentioned Chinese soybean demand will last. We are at the point of the marketing year where global demand tends to shift away from the United States and to South America as a soybean provider.
Farmers in South America are starting to see new crop soybean inventory build, and are still holding a large volume of old crop soybeans. Brazilian farmers can receive record values for these soybeans, which is encouraging sales.
The elevated soybean demand we have seen in recent weeks has not been present in corn. In fact, corn sales and loadings are falling behind on a pace that has already been reduced.
The fact that U.S. corn is the highest priced in the global market is the primary reason buyers are going elsewhere for needs. One of the primary buyers passing on U.S. offerings is Japan, who has only booked 60 percent of its normal yearly volume.
We are starting to see long-range models put together for soybean balance sheets. Many of these indicate an increase in soybean ending stocks next year of upwards to 525 million bushels, and some are considerably higher.
Even with an unchanged, or slightly lower, soybean yield in 2016, an increase in reserves is likely, as many prevent-plant acres will find their way back into production.
This news alone is enough to cap new crop soybean futures, even if old crop demand would increase.
At the same time, analysts are predicting few changes to long-range balance sheets on corn. This is from the fact that demand appears to have plateaued.
At the same time there is little incentive to increase corn production. Given this prediction, it is quite possible the corn complex will take the majority of its fundamental influences from the global market.
The most asked question surrounding today’s commodity market is what it will take to instigate a rally.
While there are several different scenarios that could cause this to happen, the easiest would be simple buying. We have seen short covering in the markets recently, but this is significantly different than fresh buying.
Unfortunately, the traders that would be most likely to start this buying have been absent from all futures markets.
One factor that could trump this buying to support the market would be weather. So far weather outlooks are highly favorable for spring planting and early crop development this growing season.
The fact that models indicate a warm, dry spring do give us the chance for a shift to drought-like conditions however.
As a result, it would not be surprising to see the addition of risk premium in futures.
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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