One of the biggest questions in the market right now is how much risk premium is needed, and what is price equilibrium. Given historical trends, it appears as though both corn and soybean values are in line with market balance sheets. This is especially the case in corn where we have seen stocks build considerably in recent years. Soybean reserves have also built, but that complex has a finer line when it comes to supply and demand.
The greatest negative factor we have seen in corn in recent years is the build in reserves. In just the past four years we have seen ending stocks on corn increase by 300 percent. This now has the stocks to use ratio on corn at 16 percent, which is the highest since the 2005/06 marketing year. Until we see this number shrink, it will be hard to sustain a market rally.
The concern with corn reserves is that we could see stocks build to an even higher level than from what we are seeing right now. The is mainly from the feed side. The USDA is projecting a corn for feed usage number of 5.425 billion bu for this year. In order to achieve this, we would need to see the highest fourth quarter feed usage figure in the past seven years. While this is possible, the reality of it is highly unlikely.
The United States is seeing heavy pressure in the global soybean market from South America. At the present time soybeans can be sourced into China, the leading world soybean buyer, for a $7 per metric ton discount to the United States. What is most concerning is that this spread is through the U.S. harvest when the U.S. normally dominates the global market. Unless we see a set-back in U.S. values, soybean demand will likely remain sluggish for the next several months.
One thing that is preventing soybeans from breaking is the possibility of smaller than expected production. As little as a 2 or 3 bushel yield reduction from trend and the United States will see ending stocks tighten considerably. This threat is preventing market values from deteriorating at the present time. Weather over the next few weeks will play a huge role in what we see for final soybean yields.
There has been a lot of talk in the market regarding U.S. soybean values and how we need to stay competitive with other sources in the global market. While this is true, the United States also needs to remain competitive on corn. At the present time U.S. corn is losing business to South America as their prices are favored over ours. What is more of a concern is that some buyers could start taking corn from China as their export program is close to restarting.
The greatest concern on both corn and soybeans is new crop demand. At the present time the United States has new crop sales of 137 million bu of corn and 200 million bu of soybeans on the books. These are the least amount sold at this point of the year in the past decade. The concern is that in order to see these sales increase we may need to see futures erode.
While it has not been much of a topic lately, the United States is still being affected by an El Nino weather system. The difference with this year’s El Nino and those in recent years is that the system continually strengthens and then weakens. In years when this has taken place corn yield tends to be below trend, most recently by 8 percent. A repeat of that decrease this year would leave the United States with a 161 bushel per acre corn yield, which is just under most trade estimates.
There are still concerns in the market of what changes may take place with the North American Free Trade Agreement. Mexico has become the leading buyer of U.S ethanol and continues to take large volumes of U.S. corn. The same is true with Canada, who has doubled their imports from the United States in the past year. Fears remain that this business could come to a halt if the NAFTA agreement is altered in any way.
More attention is starting to be paid to the upcoming planting season in South America. The obvious interest is in what we may see for planted acres in those countries. Another factor that can be just as important is how much South American farmers spend on inputs, mainly fertilizer. Any reduction to the use of fertilizer in South America to save money will be viewed as a reduction to yield potential as well.
The International Grains Council reduced their projections for 2017/18 world corn and soybean crops this week. The IGC lowered the world corn crop 5 million metric tons and reduced soybean output by 3 million metric tons. This is mainly from drought in the United States, Australia, and the European Union. At the same time the IGC made a slight increase to 2016/17 corn and soybean production due to large crops in South America.
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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