This year’s harvest has just wrapped up and we are already seeing speculation build over next year’s crop sizes. For corn analysts believe that even if yield is steady with this year we will maintain a carryout of 2.2 billion bu. Others believe that if weather returns to more normal conditions this will elevate yield and push ending stocks to nearly 3 billion bu. Under either of these situations it may be difficult for corn futures to rally much from their current levels for another year.
One difference between this year and next is corn demand according to several analysts. They feel our depressed futures are bringing us more and more business. One that is being watched the closest is ethanol, as the United States is seeing more export demand for our ethanol than in the past. While this is true, it may be hard to produce more fuel given the fact the industry is already running at full capacity.
The same yield and carryout scenario is being planned out in the soy complex. Even if yield would climb as little as three bushels per acre next year it is easy to paint a picture where soybean carryout increases considerably. This is especially the case if we see acres slip over from other crops. Some models show soybean carryout hitting 840 million bu next year, and a few are closer to 1 billion bu.
Earlier in the season it was thought double cropping would be minimal in South America this year. This is from the slow start to the initial planting season. Planting has rapidly advanced in South America though, and is close to the average pace. Given the fact weather has also improved in Brazil in recent weeks we could easily see no less than the usual amount of double cropped acres this year.
Trade has shown concern with slow U.S. soybean exports this marketing year, but domestic demand is on the rise. Recent monthly reports indicate both soybean crush and ethanol grind on corn is above the levels seen a year ago. For soybeans this increase is 7 million bu and on ethanol it is 12 million bu. This is helping off-set any decrease to export demand, especially on corn.
The most attention is being given to U.S. ethanol production figures. At the present time U.S. ethanol production is running 3.6 percent above that of a year ago. The U.S.D.A. is only forecasting an increase in ethanol manufacturing of 1 percent. If the current pace continues it will add 180 million bu of demand to today’s corn balance sheets.
When it comes to the global corn market the greatest unknown remains how much inventory China is sitting on. It is believed that China is still sitting on between 6 and 8 billion bu of corn in reserve. While this may be possible, sources claim only 2 billion bu is what would be considered high quality corn. The question is what will be done with the remaining bushels, with most thinking it will end up being used for ethanol manufacturing.
The United States is starting to use more of its bio-diesel manufacturing capacity. In the latest two monthly reports U.S. biodiesel manufacturing totaled 149 million gallons for each month. To reach these levels the industry consumed a record volume of corn oil and the second highest volume of soy oil on record. Trade believes this increase is the result of the tariffs that have been placed on Argentine biodiesel imports.
Chinese officials are starting to revise their ag support policies, and the results could have significant impacts on production in that country. For one, the Chinese government wants to reduce support to small farms, as these are less efficient and require the greatest payments. These also tend to be on the poorest ground in China. By removing payments to these operations, more resources can be focused on better producing areas.
The Chinese government also wants to see more balance when it comes to support payments. Right now China has different payments for different regions of the country. As a result, some areas are over-produced while others are being under-utilized. Corn support payments are also higher than those for soybeans. But making these changes thoughts are China will be able to reduce high volumes of corn being stored, and elevate soybean production to reduce import needs.
December can be a very active month in the commodity markets. This is mainly from quarter and year end positioning. We also tend to see thinning volume as the month progresses and traders exit the market ahead of the holidays. It is not uncommon to see the combination of these factors cause elevated volatility in the market.
December is also a time of the year where more interest is placed on the cash market. Basis volatility is increasing which is not uncommon at this stage of the year. Many producers have marketed all of the inventory they intend to for this calendar year and will wait until January before selling more. Even then, many producers claim they will only market minimal amounts until they see market gains. As a result, buyers are being forced to push basis levels for coverage.
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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