As we approach the spring planting season more attention is placed on the new crop corn/soybean price ratio. Typically this runs at 2.5:1, meaning it takes 2.5 bushels of corn to equal the value of one bushel of soybeans. Any variance from this level has been shown to sway acres in one direction or the other. The current ratio is 2.6:1, giving soybeans a slight advantage from a futures aspect.
There are other factors that will impact total acres this coming year, including how much double cropping we might see. It is not uncommon to see soybeans planted in wheat fields once harvested, especially in southern states. Poor returns in recent years have limited this practice and in 2017 double cropping was the least amount since 2010. More favorable returns on soybeans this year could elevate second crop soybeans.
Another factor that will not only impact acres but production as well is weather, mainly the La Nina event that is taking place. In recent weeks we have seen a slight build in La Nina readings indicating it could impact U.S. production this year as well. In most La Nina years the United States tends to have elevated drought conditions in the south and wetter conditions in the north during the spring months. This could easily bring an early planting season to southern states, which tends to lead to elevated corn acres.
There is a noticeable trend starting to take place in U.S. crop production. Ever since the 2014/15 crop year total U.S. acreage has held nearly steady between 307 and 308 million acres. This is nearly an 8 million acre reduction to previous years. At the same time, U.S. production has actually increased as more focus is placed on higher producing acres.
Trade continues to question current corn demand estimates. While the U.S.D.A. did increase corn exports in the latest supply and demand report, this number may simply be off-set in future reports. The one being questioned the most is feed demand, as some analysts believe this number is currently over-estimated. There are also thoughts that the South American crops are not as poor as reported and buyers will not come to the United States for as much coverage as predicted.
We are seeing a development in the soy complex this year that trade is not accustomed to. For the past several years we have seen a high initial soybean carryout forecast, but the number then eroded all marketing year. It appears as though this year we are going to see just the opposite take place. The U.S.D.A. has cut its soybean export forecast by 125 million bu in the past two balance sheet updates, and likely will again. This will push soybean carryout to nearly 600 million bu this year, and possibly more.
Even though we have seen solid export numbers in recent weeks, export loadings on both corn and soybeans are worrisome. Marketing year to date corn loadings are down 33 percent from a year ago. This is twice the decline in exports that is being forecast by the USDA. Soybean loadings are down 14 percent from last year with only a 1 percent decrease being forecast. There are thoughts these numbers will be corrected though as demand will increase as the year progresses.
There is also some doubt over how long this export demand will last, mainly on soybeans. China has been an active buyer of Brazilian soybeans for March and April delivery this week. One benefit the United States does have is a lack of pressure from Argentina. This could mean any decline in soybean sales is temporary and will resume as the year progresses.
What we are really seeing in the global soybean market is not a shortage of soybeans, but a dislocation of inventory. This is most apparent in South America where the large Brazilian crop is negating losses to the Argentine crop. In fact, total South American soybean production is likely to be larger than a year ago, with more soybeans in Brazil and fewer in Argentina. This development will put more emphasis on logistics when determining a global value of the soybeans.
There is a change taking place in the global market that is easing some concerns over slow exports on corn and soybeans. This is the elevated demand we have seen for finished products, mainly beef, pork, and ethanol. We have seen buyers surface for our products in Central America and Asia in recent weeks and thoughts are this demand will increase. Hopes are if we see any decrease in demand from possible alterations to the NAFTA agreement this added usage will make up for it.
The United States has had a surprising development in the ethanol market that bears monitoring. China has been listed as a sizable buyer of U.S. ethanol in recent weeks despite rising domestic production. These are the first significant Chinese ethanol purchases from the United States in over a year. Industry officials are hoping this is a trend that continues and draws down the large ethanol stocks that are weighing on the market.
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.
Please Enter Your Facebook App ID. Required for FB Comments. Click here for FB Comments Settings page