Trade continues to release predictions on carryout for both this year and next. It is believed that next year’s corn yield will hold at 172 bushels per acre and acres will total 91 million. Given projected demand this would leave the United States with an adequate 2.2 billion bu carryout. Some scenarios have corn yield climbing to trend adjusted 178 bushels per acre under more favorable weather conditions though, which would push ending stocks closer to 2.7 billion bu.
The same prospects are being made for soybeans. Under current acreage and a yield projection of 52 bushels per acre we see carryout increase to 550 million bu next year. As with corn some analysts feel soybean yield will increase under less stressful conditions, and propel carryout to a huge 800 million bu. While this seems unrealistic at this time, the possibility is keeping speculative buying interest in the soy complex to a minimum.
The most disagreement on these outlooks is on the yield per acre numbers. Market bears are quick to claim yields this high are unrealistic. While that was correct just a few years ago, this year proved just how much genetic improvement has been done and how resilient plants have become to adverse weather. From this point forward the market will need proof of yield loss before adding as much weather premium to futures as in the past.
While a lot of attention is being placed on production moving forward, just as much should be on usage. This is especially the case on soybeans. Historical trends indicate trade is underestimating demand in soybean balance sheet outlooks. Some of these indicate soybean demand will increase as we move forward enough to prevent any build in reserves, and actually cause them to contract. A few of these outlooks have us dropping soybean reserves to a point where rationing would be necessary.
One factor that all of these estimates are over-looking is global production. Any rally in commodity futures will spur additional production in the global market, mainly in South America. This is especially the case in soybeans. We are also starting to see global yields increase as farming practices improve and advanced technology becomes accepted.
Harvest is winding down across the Midwest. As it does, cash buyers are paying very close attention to movement across the interior market. Stocks of both corn and soybeans are record high, and buyers do not want to pay any more for coverage than absolutely needed. Given the volume of entries into the federal loan program, it is possible that neither commodity will move without an incentive being paid.
While storage has been tight across the Midwest this year, it has not been as bad as some analysts had expected. This has some claiming yields were not as large as reports indicate, and while this might be the case in some regions, but there are other more likely reasons. One is how long harvest has been stretched out. This has allowed 3 billion bu of corn to be consumed since harvest has started, and prevented facilities from overflowing with deliveries.
Another reason is the addition of on farm storage capacity. Several farmers across the Corn Belt have added storage capacity in recent years which is reducing the amount of inventory that needs to be moved right at harvest. Others have opted to use temporary storage to prevent fall deliveries. As a result, basis values have not weakened as much as some had expected them too.
Producers across the United States are hoping that with the majority of the harvest behind us futures will start to rebound. While this is possible, a rally at this time would actually be negative for the global market. South America is in the midst of its planting season, and any futures rally now will likely encourage more acres in those countries. Given this possibility, it is actually better for the market if futures remain depressed for the immediate future.
Even though planting is well underway, trade continues to debate potential acres in South America. There are thoughts we will see elevated soybean acres in Brazil, but a return to normal weather will prevent record sized crops from being produced. While this is a possibility, it is not a given. We have seen increased use of fertilizer and other inputs in Brazil in recent years, which in turn is increasing yield per acre.
This same development is taking place in Argentina. Farmers in Argentina applied a reported 5 percent more fertilizer this year than last. Argentine farmers are also expected to increase soybean plantings this year to avoid the high cost of production on corn. Thoughts are this could add from 5 to 6 million metric tons of soybean production to the Argentine crop.
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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