Variability continues to be the one consistent factor with this year’s crops. Some regions of the Corn Belt are reporting their best crops ever, while others claim their crop is close to a total loss. This is making it nearly impossible to accurately predict this year’s crop sizes to an exact number. It is quite likely we will be debating crop size right up to the final report in January, and possibly further.
One factor that is again becoming apparent is that crop ratings are not a good indicator of yield potential. Nearly all growing season we have seen low crop ratings, yet yield forecasts have risen. This is a result of crop conditions not picking up on key factors such as ear and pod weight. There is little doubt that this year’s yields will change the way trade looks at condition reports moving forward.
One seasonal development that takes place with the onset of harvest is basis weakness. Basis values across the interior market have firmed recently, but are still weaker than usual. The average soybean basis across the United States is 38 cents wider than the five-year average. Corn basis is 20 cents weaker than the average. These weak basis values are a good indication of how ample reserves are, and are trying to push sales into the deferred months.
The fringe areas of the Corn Belt has received much attention this year. All season we have been hearing of very high if not record corn yields in fringe states. There are now thoughts that these will carry into the heart of the Corn Belt. Even if yields are slightly lower in the Midwest, there are thoughts these higher yields in outlying areas will make up for them.
It appears as though the USDA over-estimated corn demand during the last marketing year. While initial projections were likely close to possible demand, many things changed during the year that were slow to be recognized. The primary one of these was the increased use of domestic corn in China, which halted distiller grain imports, and eventually led to ethanol exports from the country. This was a primary factor demand for US corn in the global market softened, and likely will this year as well.
One of the greatest reasons domestic corn demand is down is competition from alternative feed grains. This is mostly from distiller grains. China has exited the US DDG import market, but a large portion of this was negated by elevated sales to other countries. US ethanol production has increased DDG output by 4 percent though, which means we need exports to increase, not hold steady.
Trade remains concerned with the slow start to the new crop export program on soybeans as well. New crop soybean sales are the lowest we have seen in several years, with bookings to traditional buyers such as China down over 70 percent from last year. The greatest concern with this is that this is normally the time of the year when the United States dominates world soybean trade. Last year the United States shipped out 45 percent of its soybean commitments from October through December.
The main reason for the slow start to soybean exports is competition from South America. Brazil alone is forecast to export 9.6 million metric tons of soybeans in September according to Advance Trading, compared to 3.4 million metric tons a year ago. This equates to 228 million bu of elevated soybeans demand. Much of this is expected to go to China, as the United States has seen little interest from that buyer.
Weather in the United States remains a factor for trade. Soil moisture levels are lower than usual in many states at a time when rain events become less numerous. The concern with this is that the United States will enter the winter months in a drought that will not be remedied prior to next spring. While it is far too early for this to generate any buying interest in the market, it will help give the market down-side protection.
There are several changes taking place to the US ethanol industry that could have long-lasting implications. The main one is how ethanol blending and the use of Renewable Identification Numbers, or RINs, are used. There is a proposal to start allowing these to be used on ethanol exports. By doing so, it could increase the volume of ethanol the United States exports, and help work through large stock piles of the fuel. At the same time, it could greatly reduce ethanol usage domestically, and prevent renewable fuel use from expanding.
One of the main stories in the market right now is the low water levels on US rivers. For the past few weeks this has been restricting barge movement, and now it has completely halted traffic in some spots. These issues have increased demand for rail movement of inventory to the gulf region. As a result, basis values have seen wide swings, with many buyers paying large incentives to hold stocks until later in the marketing year.
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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