Weather is starting to have more of an impact on today’s commodity market. This is not just from a production point of view, but from a general change in attitude. As we approach the spring planting season many farmers simply lose interest in marketing and focus more on production.
This can also change what fundamentals influence the market, with supply and demand becoming less of a factor in daily price discovery.
This is also a time of the marketing year when we see an addition of risk premium to commodity futures. Risk premium is buying in the futures market, and done as a risk management move in case adverse weather does develop. One factor that is limiting the amount of risk premium and buying interest we are seeing this year is the ample supply of both corn and soybeans in the global market. Another is that futures are already holding a premium to previous years, especially soybeans, which are trading at $1.25 per bushel premium to last year.
El Nino cometh?
There is more talk of an El Nino system developing this year, and what impact it could have on world production. In the United States, an El Nino tends to favor corn production.
According to research from the firm F.C. Stone, corn yields in El Nino years are above-trend 72 percent of the time. This deviation from trend ranges from 2 percent to 7 percent. One big factor on how the event affects corn production is how fast the system builds.
Even though just updated, trade continues to question U.S. soybean export forecasts. Weekly sales have started to decrease in volume and are now trailing the pace seen a year ago.
What is a greater concern is that soybean loadings are not at a pace that will meet yearly projections, which indicates demand is front-loaded.
Analysts are quick to claim that soybean demand will increase later in the marketing year once South American sales trail off.
Slowing soybean demand?
Trade is also starting to question what we will see for a crush number on soybeans in the next set of supply and demand figures from the USDA. In the last report USDA increased its yearly crush estimate by 10 million bushels.
Since then, crush plants have been reporting poor margins and reports have indicated crush is down across the United States. Trade had been hoping soybean crush would rise to compensate for a slower export pace.
There is data that suggests demand for soybeans and soy products is slowing in the world market on a whole. One reason for this is the increased use of wheat as a feed grain. Wheat has a higher protein content than other feed grains, so less supplementing with soybean meal is needed.
Another factor is the elevated use of distiller’s dried grains as ethanol production ramps up around the world. Some studies point towards a 12 million metric ton decrease in soybean demand from last year as a result of these changes.
While fundamentals are less than favorable for the soy complex right now, this could change in a rather short amount of time. Soybean demand continues to grow and is consuming most of the elevated world production we are seeing. In fact, just a trend yield on soybeans next year could cause a contraction in the global supply.
Anything less and we could easily see rationing develop, especially if consumption continues to increase at its current rate.
U.S./Mexico trade relations are again a main topic in the market. Mexican officials have announced they are in talks with Argentina on corn trade, even though U.S. corn is being offered at a 50 cent per bushel discount to Mexican buyers. The decision by Mexico to look at Argentine corn is wholly political, and in response to proposed U.S. trade regulations.
There is a proposal in Brazil to reinstate the country’s 20 percent ethanol import tax. This was enacted when sugar production dropped to a point where ethanol imports were needed to satisfy demand.
Now that sugar production has rebounded, Brazilian sugar producers have requested the tariff be placed back on imports. This is concerning for the U.S. ethanol industry, as exports to Brazil have been the leading source of profitability for manufacturers.
Another country that is having a significant impact on the world ethanol market is China. China has increased the use of its domestic corn in ethanol manufacturing, virtually removing them from the import market.
Chinese officials hope to double domestic ethanol manufacturing in the next few years to help chip away at domestic corn reserves. It is not out of the question that this could eventually lead to ethanol exports as well.
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.
Please Enter Your Facebook App ID. Required for FB Comments. Click here for FB Comments Settings page