Historically, the U.S. cash market has been dictated by what took place in the global market, mainly from exports. While the global market is still a major factor in price discovery, there are other factors that are having just as much of an impact on commodity values. This is especially the case in the cash market.
Cash values in the interior market are more influenced by local demand than export values. This is a result of the ethanol boom that started over twenty years ago. Over this time period we have seen interior corn demand increase to a huge 5.5 billion bu to become the leading use of U.S. corn. As a result, corn prices are now more locally set than from the export market.
This same shift is taking place in the soy complex. Many new crush plants have been built in recent years, consuming more soybeans domestically.
The addition of this domestic demand has both positive and negative factors. One positive one is that bids are more local, and based more on actual supply and demand. Another is that in many cases it has elevated local cash markets to some of the highest in history. At the same time, it has created more volatility in the cash market. While local buyers need product, they are more willing to go hand to mouth on raw products, which has greatly narrowed the windows of opportunity when it comes to making cash marketing decisions.
This increase on domestic corn and soybean consumption has not isolated the United States from the global market. While we may not be exporting as much corn or soybeans as in years past, we do need to export the finished product. A prime example of this is in the ethanol industry. The U.S. ethanol industry has expanded to a point where it is producing more product than what can be consumed. As a result, ethanol stocks have swelled to near burdensome levels. The export market has alleviated much of this pressure and helped to keep the industry profitable.
The same is true in the soybean crush industry. The United States is crushing more soybeans every year, and needs to find a home for the product. Elevated use of distiller grains in the domestic market makes exports even more crucial for crush industry profitability. While the United States is exporting large volumes of soy products, it still needs to remain competitive with other suppliers in the global market.
These changes in the U.S. are not the only ones taking affect in the commodity market. There is an evolution taking place in the world market that will impact future trade more than anything we have seen in history. This is the modernization of farming practices on a global scale.
One of the biggest changes taking place is the planting of genetically modified crops. For many years the United States was the primary producer of GMO crops. We have seen expansion to this practice in recent years as more importers are now comfortable with the use of GMO grains. The fact that non-GMO offerings are becoming harder to find is also a factor in the acceptance.
Producers have welcomed the planting of GMO crops as in many cases these varieties have a lower cost of production than conventional crops. They also seem to better withstand adverse weather conditions than non-GMO crops.
Another change is more mechanized farming practices. It is not unheard of to see farmers in some regions of the world still planting and harvesting crops by hand. The simple use of tractors and other equipment will promote expansion into regions that are not currently being farmed. Many farmers will also be able to apply fertilizer and chemicals with this advancement. Not only will these changes make farming easier, but will be beneficial for yield as well.
One factor that is holding up expansion on a global scale is logistics. This has long plagued South America. Those countries have the ability to farm much more ground than they currently are, but have not had an effective way of getting crops to export facilities. This is especially the case in Brazil where crops had to be trucked up to 1,500 miles in one direction to an export facility, much of which was over dirt roads.
In recent years we have seen these roads paved which is making deliveries easier. We have also seen new ports built in Northern Brazil, eliminating the need for all crops to move in one direction across the country.
The downfall of all of these improvements to global production is that the United States is no longer the leader in the world market. Buyers now have many more sources of corn, soybeans, and wheat to choose from. As a result, the United States needs to remain more competitive on price than ever to maintain a share of global trade.
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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