Weather remains a primary factor in today’s marketplace. This is both for the United States and South America.
The building La Nina weather system is getting more attention in the market. The main reason is that weather patterns at this time do not agree with a historical La Nina event. The main difference is how wet it has been in Argentina this season. This is generating ideas that the La Nina may not be strong this year, and could have little if any impact on crop production.
It is becoming more apparent that weather did not affect this year’s crops as much as thought. Even though weather was less than perfect, yields continue to run above expectations in many areas, and are above average as well. This is being credited to improved genetics and the cool finish we had to the growing season. This added test weight to the crops, especially on corn.
There is a pattern that has been established in the market that appears as though it will last. Ever since the start of harvest farmers have been sellers of soybeans and held corn. This is mainly from the fact more revenue can be generated with less volume being sold on soybeans than corn. This could cause some logistic issues later in the harvest season if terminals do not have enough ownership to make sales.
The delays that took place at the start of harvest could have long-lasting implications on the market. This is not so much on production, but on fieldwork. Delays have limited the amount of fall fieldwork that can be done in many areas, meaning more will have to be done next spring. It is not out of the question that this could end up affecting next year’s acres, especially if weather next spring is less than perfect as well.
Now that the U.S. harvest season is moving into the later stages, more market attention is being placed on the South American planting season. While weather will have a major impact on production in those countries, so will economics. Currency values have been strong in South America, mainly Brazil, which reduces input costs. As a result we could easily see heavier input usage and higher yields per acre.
We are seeing wide discrepancies when it comes to corn planting reports from Brazil. The window that is considered to be the optimum for the planting of the initial corn crop in Brazil closed at the end of September. It is believed that only 40 percent of the crop was seeded by that time. While we did see corn planting after that, the yield potential is being highly debated.
This uncertainty over the first corn crop in Brazil is putting more emphasis on the Safrinha crop that will be grown next summer. If production of the first corn crop is as low as some analysts believe, up to 75 percent of Brazil’s corn supply could come from the Safrinha harvest. Typically, this crop is used for exportable bushels out of Brazil. This year it is believed a large amount may be needed to cover domestic demand, reducing how much corn Brazil can ship out.
We have seen soybean acreage contracting in Argentina over recent years from tax disadvantages, but this may be coming to an end. President Macri has eliminated many of the taxes on grains in Argentina, while keeping the soybean export tax at 30 percent. This tax will now start to be reduced as well, making that crop more favorable for production. This change could easily cause a build in soybean plantings in Argentina, especially if soybean values appreciate.
The current stocks to use ratio on corn is giving trade mixed signals. The U.S. stocks to use is currently one of the widest in recent history at 16.4 percent. This is giving trade the indication that corn is plentiful, which it is in the United States. At the same time the stocks to use in the global market has been tightening, and while still adequate, does show that world corn consumption is outpacing production.
While domestic corn stocks are adequate, there are signs it will tighten. One of these is feed demand, which the U.S.D.A. increased in the last supply and demand report. This was not from increased livestock numbers, but rather from a projected decrease in wheat feeding. The price spread between wheat and corn is now narrow enough that feeders will not substitute wheat into feed rations.
Worry is building over the state of the rural economy. A recent survey of rural lenders shows 10 percent are concerned with the possibility of foreclosures over the next five years. This is mostly from the fact that commodities, mainly corn, continue to have a value that is below the cost of production. Building tensions in the global market over trade pacts could pressure commodity values even more.
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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