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KARL SETZER

By Staff | Sep 16, 2016

According to some models, U.S. corn futures are currently overvalued. This premium in corn values is coming from thoughts that weather in July did more damage to crops than what is being seen.

This is reminiscent of the year 2010 when yield estimates were reduced late in the growing season.

While there are similarities between weather this year and 2010, there are also some major differences. One is that overnight temperatures this year were not as high as those of 2010.

Another is that hot conditions affected the crops that year for a longer period of time than they did this year. Much of the corn crop missed adverse conditions during the critical pollination stage of growth this year.

Even though U.S. corn is reported as over-valued, it is still some of the most affordable in the world market. A buyer can currently book U.S. corn at a 30- to 35-cent per bushel discount to most other sources, mainly Argentina.

One buyer that could benefit the most from this is China. China has been trying to auction off government reserves to satisfy demand, but these are at a substantial premium to U.S. offerings.

Doubt is being cast over the volume of expansion that is expected to take place to Brazil’s soybean production this coming year. Expansion of 5 to 7 million acres are needed to satisfy growing global demand for soybeans, but we may now only see half of this total.

Weak soybean futures and currency valuations are making the planting of soybeans less attractive than in recent years. This factor may be the greatest benefit for soybean values over the next few months.

There are also thoughts in the market that Brazil will plant more corn than analysts have been reporting. This is from the more favorable prices being paid for corn as Brazil is facing a severe corn shortage this year. Corn also carries a lower cost of production than soybeans. Some reports indicate corn planting will expand by 13 percent this coming year in an effort to make up for this year’s losses.

While this is possible, the door is still open for elevated U.S. exports until production does rebound.

The real concern in the global market is if Brazil will plant enough soybeans to help satisfy global demand. Global soybean production keeps rising, but demand is rising even faster, mainly in China. This may all change in the near future though, as Chinese officials have announced the country will soon start planting GMO soybeans.

China plants nearly all non-GMO soybeans, and as a result, their yields are roughly 45 percent of those who do plant GMO soybeans, mainly the United States.

Global economics are starting to have more of an impact on the commodity market. This is not just from a production aspect, but from marketing as well.

Producers in countries with unstable economies are once again holding their commodities as a hedge against inflation. This is most noticeable in South America, where Argentine farmers are storing as much as possible right now.

Not only will we see adjustments to corn production in future balance sheets, but likely to demand as well. One getting the most attention is feed. The USDA is expecting to see a 375 million bushel increase to feed demand on corn from this marketing year to next.

Thoughts are this is from the elevated livestock numbers we are seeing across the U.S., but the fact corn remains cheap compared to other feed grains may also keep its demand elevated.

Concern is building in the global market over the supply of feed grain that is available. According to data from the firm F.C. Stone, feed grain demand increases 29 million metric tons every year. While this seems positive for the grain markets, production has risen at an even faster rate.

Given the excess feed grain the world market is sitting on, a slight decrease in corn production could be readily absorbed, and in many cases, would be welcomed to benefit values.

One demand that may not change for corn is ethanol manufacturing. In the August balance sheets USDA increased corn use for ethanol by 75 million bushels, but decreased old crop usage by 25 mb.

Given recent production numbers, some analysts thought these would both be higher. The primary reason this demand has not grown is the efficiency we are seeing in today’s ethanol plants, and how more fuel is coming from a bushel of corn today than ever before.

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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