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KARL SETZER

By Staff | Feb 10, 2017

The developing trade rift between the United States and Mexico continues to be a source of market interest. Not only does Mexico import a large amount of commodities, but commodity products as well.

One that is receiving more attention is corn syrup, with Mexico accounting for 80 percent of U.S. exports. Alternative sources have already stepped up to claim they could easily supply Mexico with this and other products if needed.

Will they? Won’t they?

Trade is becoming more divided in what impact the loss of commodity trade with Mexico would have on the United States, and even if it would in fact happen. While there is a threat of Mexico halting its purchases of U.S. commodities, some analysts do not believe this will take place. The primary reason is that freight from the United States to Mexico is highly favorable when compared to other sources.

At the same time, the loss of a freight incentive can easily be countered with cheaper commodities to begin with, especially South American corn and soybeans.

The industry that is most worried over potential trade relations breaking down with Mexico is ethanol. The ethanol industry is already struggling with a built-in distiller grain reserves with the absence of Chinese business. If Mexico would also drop its interest in U.S. offerings, it would create a product glut in the domestic market.

Obviously, the soy complex would feel the majority of the negative impact of this possible development.

El Nino again?

We are seeing more interest placed on spring weather possibilities for the United States. Current models indicate a weakening of the La Nina event and a possible shift to an El Nino by March. This is already giving trade the indication that this year’s yields could again be above trend in the United States.

As a result, we may see a hesitation for the addition of risk premium to future’s values.

2017 planting acres

As we approach the spring planting season is this coming year’s acreage. The United States needs to see a corn acre reduction of roughly 4 million to prevent stocks from topping the psychologically negative 3 billion bushel mark.

There are hopes that soybeans will draw acres away from corn with better returns, but so far, this has not been the case according to reports from the interior market.

The other side of this is that if the soy complex does draw this many acres away from corn, it could lead to larger stocks in that complex as well. It is not out of the question the United States could see elevated stocks of both corn and soybeans at the end of our next marketing year.

Corn, soybean ROI

Economics between the two crops are giving us little clear indication of potential acres. A study from Iowa State University shows corn is currently posting a $41 per acre positive return for 2017.

Corn economics are benefitting from reductions to variable costs and cash rent. While this is an improvement, the return for soybeans is still much more favorable at $150 per acre.

The question now is if the farmer perception that corn will produce more bushels to work with will limit acreage shifting.

Interest is starting to shift from the current crops being produced in South America to the next crops. As of right now, analysts are expecting to see more double cropping in South America this year than last, especially for Brazilian corn. This will depend on several factors though, with weather being a primary one.

Conditions have improved in South America recently, which would indicate elevated plantings.

S.A. futures

Trade is paying close attention to futures soybean production in South America as well. U.S. soybean futures are trading nearly $1.50 higher than a year ago. Not everyone is benefitting from this appreciation however.

Given currency exchange rates and valuations, Brazilian farmers is actually receiving 25 percent less revenue than they did a year ago. Not only could this limit any expansion in soybean production, but affect production on existing acres, as well.

We are starting to see volatility build in the cash grain market, especially on corn.

Buyers remain hesitant to push bids to secure corn as they know there is an ample supply of the product to be bought.

Federal loan grain

At the same time, we have seen a large volume of corn flow into the federal loan program to generate farm revenue rather than being sold. Even with a large corn supply, buyers need to keep bids attractive enough to prevent a large volume of this taking place.

A recent farm survey is giving trade a better indication of how much of the old crop bushels has already been marketed.

Research shows us that from 40 percentto 45 percent of the old crop corn inventory has been marketed.

Marketings of old crop soybeans are much higher at 75 percent of the crop. Given these volumes of sales, it may be hard to see additional selling without a rally in futures, especially on corn.

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.

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