A big story in this week’s trade was that Brazil’s President Temer has been bribing officials in that country, including commodity inspectors. This caused the Brazilian currency to collapse, and in turn, caused soybean values in Brazil to spike higher. This generated fears the Brazilian farmer would become a heavy seller of soybeans as the commodity value is now back above break-even. In turn, this would increase pressure for U.S. soybean sales in the world market.
While it is believed that we will see elevated selling out of Brazil due to government issues and a weaker currency, there are other implications of this development as well. One is that a weak Real will increase the cost of production for a Brazilian farmer next year. Another is that a producer in Brazil may opt to hold their inventory as a hedge against a weaker currency, and prevent sales from happening altogether.
The United States has had solid export business on corn this year, but many analysts are questioning as to why it hasn’t been higher given the low value of the grain. The answer is from the fact the United States has spent several years developing an ethanol program, and in doing so, lost a large volume of traditional corn business. Now that buyers are working with other suppliers, it is going to be hard for the United States to get that business back.
When it comes to the global corn market, the most interest remains on China. China is sitting on a reported 10 billion bu of corn it needs to work through. Analysts in China claim it will only take five years to work through this inventory, but this seems rather optimistic. Even with slightly higher usage, it may take twice as long. This means the U.S. may see low Chinese demand for corn and corn products for at least that time frame.
The United States may soon see elevated competition in the global market for corn business. This is coming from South Africa, where corn production has rebounded considerably following last year’s drought-stricken crop. As a result, officials in South Africa believe the country will have 140 million bu to export, with most likely going into the Asian market. While this is a minimal amount, it would be enough to negate several of the other increases in corn usage that are being forecast.
Analysts are starting to raise their corn and soybean yield estimates. This is stemming from weather forecasts that are calling for favorable conditions, mainly ones indicating the build of an El Nino. Given current indicators and outlooks, statistics point towards a 70 percent chance of above trend yields on corn and soybeans this year. Outlooks such as these have greatly reduced any desire to add risk premium to today’s market.
Traders are still tallying losses in Argentina from adverse weather this growing season. Flooding is thought to have reduced the size of the Argentine soybean crop by 1 million metric tons. Even if it has, this would still leave Argentina with a crop that would be 5 million metric tons larger than initial estimates. This is a minimal loss, and will easily be off-set by the large crops in Brazil and other countries as well.
While current corn basis values remain historically wide, this could change in a short amount of time. End users have been picking up their corn piles across the interior market to satisfy demand. Others have been pulling delivery contracts forward to meet usage. Once this inventory is consumed, these plants will need to push basis more for deliveries, which could easily create more favorable basis values on corn.
This same situation could easily develop in soybeans. The U.S. farmer has already moved a large volume of soybeans and may want to see how the crop develops before extending sales. This same scenario is taking place in South America. As a result importers may be forced to pay a premium for needs, even with large global reserves.
A story that has not received as much interest as one would expect recently is the U.S. importing of corn from South America. The immediate reaction to this news was that it had to be from price, and how South American corn is cheaper. While this may be one factor, there are several others. One of the main ones is the high levels of toxins in Eastern Corn Belt this year, and how feeders want to avoid using this grain if possible.
This importing of corn is a factor in a changing market on a whole. For many years the United States was known as the main supplier of grain and soybeans to the global market. In recent years this has changed, and now the United States is just one supplier of many. The most competition is with South America, so to see imports from those suppliers into our coastal regions may become more regular.
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.