We continue to see a wide range of estimates released when it comes to this year yield possibilities. This is a result of the difference in methods used to collect data to make yield estimates. These range from farmer surveys to actual field collected data to the use of satellite imagery. As a result, trade has taken a “wait and see” approach to yields and is waiting for actual harvest results for price discovery.
Many analysts are using crop ratings as a means of predicting final yields, especially on corn. The U.S. corn crop was rated 61 percent Good/Excellent on August 1, which is the second lowest rating on that date in the past ten years. While this appears to be negative, there are several years when corn was rated that low on August 1 and still managed a tend or even slightly higher final yield. In every one of those years the crop benefitted from near perfect weather conditions in August.
Even with lower priced corn, economics remain depressed in the ethanol industry. This is mostly from an over-supply of ethanol and lower valued energy products on a whole. One source of support for ethanol has been exports which are expected to total 1 billion gallons this year and are forecast to climb to 1.3 billion gallons next year. The fact that we had a build in ethanol reserves even with these exports is a major concern for the industry.
What is most concerning for the ethanol industry is that exports will not increase and corn values will rally. This would push several ethanol plants into negative territory on returns.
A tremendous amount of old crop inventory continues to be held rather than sold. This is being done to capture the carry in the market, particularly on corn. The concern with this is what may happen as we approach the harvest season and storage facilities are still full. Even if the commodity is brought to a commercial storage facility it cannot be shipped out if the producer still has ownership of it.
It is not out of the question that this could cause widespread logistic issues, especially in areas where yields are high.
Trade is paying close attention to Chinese soybean production. Chinese officials claim farmers in that country planted 9 percent more soybeans this year than last, which is expected to increase production by 1.5 million metric tons according to data from the group Advance Trading. In turn, this would reduce China’s soybean imports to just 91.5 million metric tons this coming year. While China is still consuming large volumes of soybeans, this reduced output will allow them to rotate their government reserves.
Forecasters in Brazil are also starting to make predictions for this year’s crops. The firm Celeres is projecting a Brazilian soybean crop of 109 million metric tons this year, down from last year’s 113.8 million tons. The country’s corn crop is estimated at 95.8 million metric tons compared to last year’s 100.7 million tons. Planted area is expected to remain the same in Brazil, but a return to normal yields is behind the lower estimates.
Soybean values have been depressed in recent weeks, and while most have been discouraged by this, it has actually been a benefit for the soy complex. For one, this move has made the United States the cheapest source of soybeans in the global market. This should help the United States catch up on a new crop marketing program that has been struggling. The depressed values will also help deter expansion in South America and prevent global soybean stocks from rising even further.
The concern is how much soybean export business the United States may have already missed out on in the meantime though, especially with China.
US soybeans are finally becoming the most affordable for Chinese buyers. At the present time US soybeans delivered to China for fall are being offered at a $12.00/metric ton discount to those from Brazil. While not this wide the U.S. now holds an advantage until early spring. Hopes are this will finally bring the United States some much needed new crop export business.
An announcement has been made that the United States will be imposing strict import tariffs on biodiesel from Argentina and Indonesia. This is in retaliation to the fact these countries have been selling biodiesel to the United States at an artificially delated price. In most cases this was below the cost of production.
The knee-jerk reaction to this news is that it will increase domestic soy oil demand and in turn, soy crush. While this is a legitimate response, the United States would need to see crush increase 340 million bu to off-set all of the current bio-diesel imports at this time. This would put crush needs at a higher level than the entire U.S. crush capacity. Instead, we may see soy oil values rise to a point where they will compensate for the added tariffs, and no change will take place to imports.
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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