There is a major difference taking place between this year and last in the soybean and grains markets. Last year crop sizes were gradually reduced all year due to weather issues in South America.
This year crop estimates are starting to increase. This has greatly reduced the urgency to book commodities to secure coverage.
There is also uncertainty developing over this year’s soybean demand. Last year, when South America started to suffer losses from weather issues, buyers were quick to shift their interest back to the U.S. This is unlikely to happen this year as Brazil’s production is the primary reason the global soybean crop size keeps growing.
The fact that demand has not changed in U.S. balance sheets for the past four months shows the USDA is in agreement with this opinion.
A year ago when soybean reserves started to tighten the numbers eventually were less than half by the end of the marketing year. Some traders believe this decrease will be repeated this year regardless of USDA outlooks, and have already taken a long position in the complex.
The U.S. soybean market is in a tight spot right now. There are many analysts who believe soybean futures need to rally to sway U.S. acres away from corn. While this is possible, the concern is that if futures do appreciate, we will see elevated plantings in South America as well.
This means soybean futures need to stay low enough to discourage South American planting, but high enough to encourage acres in the United Sates, which is a very thin line.
An unusual development could be taking place in this year’s acreage. According to a recent poll, U.S. farmers may plant more soybeans than corn this year. If so, it would be the first time in 40 years. While this is possible, the reality of the U.S. planting more soybeans than corn seems unlikely, especially if we have an open-planting season.
Even if we would see this size of a shift in acreage this year, it is questionable as to how much it would impact the corn complex. The initial reaction is that the corn market would push values to prevent an excessive amount of acres from being lost.
Yields impacting stocks
This year that is unlikely to happen though, as the market needs to lose some corn acres to prevent stocks from building to a burdensome level. In fact, any less of a shift may cause weakness to develop in the corn complex.
There has been considerable discussion on this year’s possible acres, but not as much on how yields impact ending stocks. Most analysts are expecting to see 2 million fewer corn acres this year than last. Even with this reduction, we would need to see a corn yield roughly 10 bushels per acre under trend to draw carryout below 2 billion bu with current demand.
Balance sheets are tighter on soybeans, where a 2-bushel, sub-trend yield would put the United States in a rationing situation.
We are at the point of the year where more interest starts being placed on longer range weather forecasts. At the present time many of these are indicating a warm, dry start to the growing season. In most years this would indicate an increase in corn plantings from initial predictions.
While we may not see an increase this year, a spring such as this could easily prevent acres from shifting to soybeans, especially with improved corn returns.
We continue to work further into a “buyer’s market” which is a negative factor for commodities. There are plenty of stocks of soybeans and grains at the present time and this is being reflected in buyers’ attitudes. Buyers are showing no urgency in covering needs at the present time as they do not foresee much appreciation in market values.
This has also limited basis values across the interior market from tightening, and in many cases, has caused it to widen even with depressed futures.
This lack of urgency to cover commodity needs is not just in the United States, but in the global market as well. Very few regions of the world are reporting production issues at this time. In fact, many are starting to raise their yield expectations. This is starting to be reflected in export sales, as buyers are taking more time in making purchases.
The spring crop insurance prices have now been set. For corn the insurance price is $3.96 per bushel, 10 cents more than in 2016. The soybean insurance value is $10.19, a $1.34 increase on the year. These values are based off the average closing prices for December corn and November soybeans during the month of February.
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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