Even though we are moving into the heart of the U.S. growing season for corn and soybeans, we continue to see very little risk premium associated with futures. This is mainly from the fact traders have added this premium to futures in recent years and not needed it. While there are areas of less than perfect growing conditions across the country, none are at a point where it is believed production has been greatly affected. As a result, any shift in outlooks could bring a tremendous amount of buying activity.
While the United States has likely seen yields trimmed from this year’s weather, it is impossible to determine how much. The fact that drought is not widespread nor is it as severe as in other years is making this even more difficult. History does show that if yield would reach a severe level it would trim corn production by 450 million bu and soybean production by 150 million bu. While these are sizable losses, they can easily be absorbed given current old crop stocks.
China continues to offer and sell large volumes of corn in its domestic auctions. This has generated two opinions on the Chinese corn situation. One is that buyers seem content with not only the price of the corn, but the quality as well. Another is that this could lead to corn exports if the value of corn from other sources becomes too high.
Economists are more closely monitoring the U.S. ethanol industry, mainly ethanol reserves. We are approaching the point of the year where fuel demand on a whole starts to peak, which in turn would reduce ethanol demand. We have not seen the draw to ethanol reserves that was expected this year to begin with, and we could easily see stocks build to a burdensome level. As a result, there are legitimate thoughts we will see ethanol production decline, and corn demand slip as a result.
Competition for business is building between the United States and Brazil in the global soybean market. At the present time Brazil is considerably cheaper than the United States for spot soybeans. Soybeans from the United States into Asia have a lower cost freight though, which makes the two sources nearly equal. This could limit how many buyers shift away from the U.S. for soybeans due to price alone.
The greatest concern in soybeans is the volume of unshipped sales on the books. At the present time it appears as though the United States will have 110 million bu of unshipped soybean sales on the books at the end of the marketing year. This would be a record volume, with the latest unshipped total being 80 million bu. The question now is how many of these may be rolled to new crop and how many may be washed out of altogether.
Much of the focus on soybean demand this year has been on exports, but just as much should be on crush numbers. The USDA reduced their annual crush estimate by 15 million bu in the June balance sheets. There are thoughts we will see a similar reduction to crush before the end of the marketing year as the USDA appears to have over-estimated soy meal demand. This is mostly from the elevated use of distiller grains in domestic feed rations following bans on the product by foreign buyers.
The United States and Brazil are also competing for a share of the world corn market. This is a little tighter than for soybeans. Brazil has much more corn to export than a year ago, and buyers seem more willing to take that grain over U.S. offerings, regardless of price. Both suppliers are seeing elevated pressure in the Asian market this year as well, which is weighing on what both can ask for their corn.
Brazilian officials are already starting to look forward to the country’s next production season. At the present time it is believed Brazilian farmers will expand soybean acreage by nearly 3 percent, even though economics are not that favorable. This is concerning for the global market as it would likely push world soybean stocks even higher than they are now, and put them at a near burdensome level. This expansion will depend on several factors though, but is something trade will monitor.
More debate is taking place over what we could see for planted and harvested acres in this month’s revisions from the USDA. Initially it was thought we would see a large shift from corn to soybeans, but now these are being second guessed. Economics still favor the planting of crop rather than taking prevent plant insurance, which should help limit any acre abandonment. Improved weather for corn planting should also help limit how many acres may shift to soybeans, especially in the heart of the Corn Belt.
Trade is closely monitoring the global sugar market. Sugar values have plummeted in recent weeks, and there is now talk that farmers in Brazil will shift additional acres to soybean production. This is on top of the 3 percemt growth rate to soybean acres that is already being predicted. While this is likely going to pressure the world soy market, it could end up being a great benefit for the U.S. ethanol industry. This is from the fact that Brazil produces the majority of its ethanol out of sugar rather than 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.
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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