Very few changes were made to the domestic corn figures in the December supply and demand report. No alterations were made to production, and demand was increased by 50 million bu in the ethanol sector. This decreased corn carryout to a still high 2.43 billion bu. More changes took place to the global corn balance sheets, with stocks increasing to a comfortable 204.1 million metric tons.
Domestic soybean production was also left unchanged in the balance sheets revisions. The U.S.D.A. decreased soybean exports 25 million bu due to the sluggish pace we have seen on this year’s bookings. This was enough to elevate soybean carryout to 445 million bu from last month’s 425 million bu. As with corn the global soybean reserve forecast also increased to a sizable 98.3 million metric tons.
The firm CONAB, which is the Brazilian version of the U.S.D.A., also updated their crop estimates this week. CONAB projects the country will produce 109.2 million metric tons of soybeans this year, 1.7 million more than their previous estimate. This number is still below what most privates are forecasting, as many are close to last year’s 114 million metric ton crop. The firm is now predicting a 92.2 million metric ton corn crop compared to last year’s 97.8 million metric tons of output.
The majority of the interest in recent supply and demand reports has been on production. While this is a major factor in balance sheets, usage is just as much of a factor in both balance sheets and price discovery. For corn, the only segment of demand that can increase much is ethanol, and even then only a minimal amount. Soybean usage would need to increase through exports, and at this time that seems difficult given elevated competition from South America.
Country movement of corn and soybeans has been very light following the harvest season. We are now starting to see predictions on what will take place in the cash market following the first of the year. Historically we see movement increase in early January, especially in a carry market. Movement may not be as high this year though, as farmers claim to have marketed all of the bushels they intend to for the immediate future.
One factor that is going to prevent heavy cash sales in early 2018 is elevated use of the federal loan program. Farmers are using this to generate income rather than make cash sales. As a result, this makes the corn and soybeans much harder to buy as the inventory will be used as collateral for nine months. Buyers will be forced to pay a premium to entice movement if this does in fact take place.
Ethanol profitability is becoming a concern for that industry. Nearby processing margins are holding very close to unchanged. The concern is that deferred margins are nearly all in the negative territory. The recent rally in energy values has benefitted ethanol margins, as has depressed corn values. We have seen ethanol reserves build to record levels though, which is a main source of pressure.
The real story in the ethanol market this year is in China. China wants to expand its ethanol production considerably to continue working through its large corn reserves. We have already seen this move turn China from being an ethanol importer into an exporter. Thoughts are this will be a shift that will last for several years, and cut into the U.S. share of the global market.
The U.S. soybean market continues to see global trade competition from Brazil. This is highly unusual as Brazil is normally absent from export trade during the winter months until their harvest takes place. The fact Brazil is still exporting shows us their old crop reserves were quite high this year. It is also a strong indication that Brazilian farmers feel comfortable with their new crop production.
This move is also tied to currency exchange rates which favor the selling of soybeans in Brazil rather than holding them as an investment.
There is a development in the Brazilian farming economy that is gaining attention. It is reported that just 19% of Brazilian farmers are now self-funded, the least amount in the past ten years. Many producers in Brazil have returned to the barter system for financing, where they trade a percentage of the crop for needed inputs. This is raising questions over Brazil’s ability to expand acres enough to satisfy an ever-growing global soybean demand.
Trade is starting to make predictions for what could take place in the market following the start of the new year. There is speculation that financial investors will reduce their positions in commodities as we move into 2018. If correct, this would cause additional selling pressure on the futures market. Economists are wondering how much more selling we can see though, as funds are already sitting on a sizable short position in the grains.
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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