Trade is showing more interest in the weekly crop ratings as steady declines have taken place for the past several weeks. The greatest concern is in states of the Western Corn Belt where corn condition has slipped to the lowest rating level of the year. There are also worries over the soybean crop as the weekly rating is now the lowest since 2012.
One of the most often asked questions in the market recently is, why the market is not reacting to weather concerns across the Corn Belt? The main reason for this is that we have seen a large amount of weather related buying in recent years, and then once harvest started, the crops were not nearly as small as expected. As a result, traders are not as willing to extend their buying this year until crop loss can be better defined. Reports of better than expected corn yields out of southern states is also limiting speculative buying at this time.
There are still a lot of unknown factors surrounding the stocks data that was released at the end of June. The main one being what it will take to encourage the movement of on-farm stored bushels. Buyers are hoping futures will rally enough to encourage movement and they will not need to adjust basis values. This may work on commercial stored bushels, but producers claim they will need considerably higher values to pull inventory out of on-farm facilities.
It is also possible that the unwillingness to move farm-stored inventory that has nothing to do with price. It is interesting to see that on-farm stored corn in the Eastern Corn Belt is up 16 percent from a year ago compared to a 9 percent increase in the Western Corn Belt. This is happening even as we see corn move from the Western Belt into the East. The quality of corn being held in the Eastern Belt reportedly has quality issues, mainly fungus, and farmers need higher quality new crop for blending purposes before they will move anything.
Another reason we are seeing limited old crop movement may be crop appearance. Typically old crop movement is higher where developing crops look better. Cash buyers in regions where movement is limited are now assessing not only what it will take to pry old crop bushels loose, but what they may encounter when trying to source new crop needs.
Carry in the cash market is also impacting movement. Given the large carry in the market between now and new crop, we are seeing old crop bushels sold for delivery at that time. While this is giving buyers an ample amount of new crop coverage, it could create a void in the old crop months that will need to be filled. It is not out of the question that this could cause logistic issues this fall as well.
Even with limited movement, basis values across the interior market are starting to soften. This is mainly from seasonal tendencies. Some buyers have adequate coverage to last through the remainder of the old crop marketing year and see no reason to extend bids at this time. Others are ready to take down time and claim they will remain idle until new crop bushels become available.
There has been a lot of talk in the market recently surrounding the higher corn values and how they have pressured processing margins. While this has happened in the ethanol industry, not all end users are feeling negative effects. One is the livestock industry, where high packer margins are offsetting the elevated cost of corn. These individuals believe corn values would need to top $4.50 to become a negative factor for feeding.
While much of the attention in the market has been on whole grain exports, just as much needs to be on products. This is especially the case on corn where global product demand is growing. The most increase is in ethanol, where the latest monthly report for May shows a 75 percent increase in exports from the same month a year ago. So far this marketing year U.S. ethanol exports are up 23 percent from last year.
While soybean sales out of South America have increased, they remain light compared to historical averages. This remains a result of depressed soybean values. Soybeans in Brazil are currently valued at a 30 percent discount to those of a year ago, and in many cases puts them below break-even. It is quite likely this lack of selling and reduced revenue will also impact how many new crop acres we see planted.
There is another belief in why South American soybean sales are slow this year. Some analysts are pointing towards the possibility that yields may not be as great as reported. These individuals believe Brazil soybean production was from 1 to 3 million metric tons less that reported and is preventing sales from happening. While this is a possibility, the fact Brazilian farmers are using more storage than in the past is a more likely factor.
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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