Now that the calendar has turned to March we tend to see a shift in market interest. Psychologically we see more interest on planting and production at this stage of the year. In turn, we start to see more emphasis on weather conditions that may affect crop development. As a result we can also see elevated risk premium in the market. The question this year is how much of this may be added after two good production years with less than perfect growing conditions.
Another shift in market attention at this stage of the marketing year is less interest in marketing inventory. As a result we tend to see basis volatility increase and create some attractive quick-ship marketing opportunities. How much movement we see between now and the start of the planting season will greatly affect how many of these take place.
Trade is closely monitoring the amount of corn that is being consumed by the U.S. ethanol industry. Corn usage for this marketing year has grown 3.4 percent from a year ago which is twice the expected rate. If this pace would continue it would put yearly corn consumption by the ethanol industry at a record 5.63 billion bu. While this is totally possible, there is a strong tendency for corn consumption by the industry to decrease from this point forward to the end of the marketing year.
The United States also continues to see elevated demand for its corn in the global market, but analysts remain puzzled over who is actually buying the grain. Many recent corn sales have been to “unknown” buyers. The immediate reaction to this is that China is the buyer, or that it is Mexico ahead of any possible changes to the NAFTA agreement. Either of these is possible. The concern with either of these buyers is that the demand will not last and we will again fall short of our needed pace to meet yearly expectations.
We are nearing the end of what has historically been the greatest window of opportunity for U.S. soybean sales in the global market. This is because we are now at the stage where South American soybeans are more readily available for export. The concern with this is how far the United States is behind expectations on soybean loadings. Soybean exports are currently 13 percent behind estimates and signs are they may slip even further.
China continues to work through their domestic corn reserve by ramping up ethanol production. The question with this now is how far down China is willing to reduce their corn supply. Given reported usage levels and stocks, it appears as though China will maintain an adequate corn reserve through the year 2021 without significant imports taking place according to numbers from the group F.C. Stone. Thoughts are that at that time China will either need to import corn for needs, or import finished products such as ethanol.
There is another option that China has, however. This is to make ethanol out of alternative raw stocks, mainly coal. China has a tremendous supply of coal that can be used to manufacture ethanol for a relatively low cost. Chinese officials say this is a path they would like to pursue as it would give the country cleaner burning fuel while limiting competition with its food supply.
Trade is already debating what we will see for a Brazilian soybean production number in the March balance sheets. Last month the U.S.D.A. pegged the crop at 112 million metric tons. While this was an increase and higher than the official numbers out of Brazil, it is still less than what many private analysts are using in balance sheets. There are thoughts the crop will top last year’s 114 million metric ton crop, with some analysts predicting a record 118 million metric tons crop.
There are two main reasons for these higher soybean crop estimates in Brazil. The main one is that growing conditions have not been very stressful this year, especially in regions where the majority of Brazil’s soybeans are grown. At the same time Brazil increased soybean plantings by 3.5% this year. The combination of these two factors could push soybean yields to the levels seen last year, which would put crop size closer to the 118 million metric ton projection.
The most interest when it comes to South American production is on Argentine soybeans. We have seen several reductions to the size of the Argentina crop in recent weeks, with some dipping below 50 million metric tons. This is the level that trade is closely watching, as Brazil can easily cover any soybean loss up to that point. Higher losses can be covered as well, but it may require Argentina to dip into their reserves to do so.
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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