Markets were shook this week as China placed a 25 percent import tariff on U.S. soybeans. This only adds to tariffs that are already in place on U.S. pork, ethanol, and several other commodities. The concern with this is what will happen to Chinese soybean sales that are already on the books. To see them canceled would not come as a surprise, especially with the new crop inventory from South America hitting the market.
We are already starting to see projections released for the 2018/19 balance sheets. As expected, these numbers have a wide range of possibilities. There are thoughts that if we see as many acres shift to soybeans as some analysts predict and we experience normal growing conditions, new crop ending stocks could top 900 million bu given current demand. If trend would happen to decrease just three bushels from this year we could see soybean carryout of 250 million bu though, which is why we are seeing the speculative buying that we have.
The big question in these outlooks is what would happen if the U.S. soybean carryout would top 900 million bu and possibly approach 950 million bu. Economists are quick to claim that if stocks would reach this level, we would see a build in demand, and they would quickly be lowered. While this is possible, it would depend heavily upon the world market and what other sources offered their soybeans for as well.
In all reality, soybean futures do not need to drop low enough to spur demand to be considered friendly. If soybeans recede just enough to prevent expansion in Brazil it would put a positive spin on the complex. It is believed that if soybean futures are below $10.00 per bushel it will prevent Brazil from adding more soybean acres. As always there are several factors that can influence this decision, with currency valuations being a primary one.
The same scenario is being played out in the corn complex. If the United States would see a corn yield that is adjusted for trend this year and demand remains constant, we could see a new crop carryout of 2.6 billion bu. If yield would back off to the level seen just two years ago it would cut our ending stocks to 1.5 billion bu. While this level may not instigate rationing, it would be low enough to warrant higher corn values.
Trade remains concerned with the low export loadings the United States is seeing at the present time. The most attention is currently being place on corn, as we are a large 30 percent behind the export pace that was seen a year ago. This does not justify the increase in export demand that was made in the latest balance sheet update. At the present time it appears as though exports are over-stated by 200 million bu.
The difference between sales and loadings in soybeans is just as significant. At the present time it appears as though soybean demand is over-estimated by a large 240 million bu. Not only would this impact old crop balance sheets but new crop as well, especially if production increases as much as some believe it will. The difference between corn and soybeans is that traders think the United States’ soybeans will be needed to make up for the short crop in Argentina this year and demand will build as we move forward.
We are receiving mixed signals from the global ethanol industry. U.S. ethanol stocks have recently reached record levels. One reason for this is that China, who was a leading importer of U.S. ethanol, is producing more of their own fuel. Other buyers have backed away from the U.S. as an ethanol source and turned to suppliers such as Brazil. This may change in the near future though, as Brazil is expecting the smallest sugar cane harvest in five years, which will limit their ability to produce and export ethanol.
There has been some concern in the market that we may see a slow planting pace this year from the recent cool, damp conditions, but this is a little premature. It is a well-known fact that much of the U.S. corn and soybean crops can be planted in as little as ten days if needed. Add this to the rapid corn planting we have already seen in southern states and it makes the probability of planting delays even less likely. Even if we do see a slower than normal pace it will be difficult to receive much of a market reaction given current fundamentals.
One of the most watched factors in today’s market is what basis does ahead of the spring planting season. Typically this is a time when basis values start to tighten as country movement declines. Several buyers report having adequate coverage for the next 30 to 45 days though, so one would think basis may not tighten as much as in a normal year. While basis will likely remain softer than usual because of this, it is still possible to see narrow windows of tight basis until planting concludes and deliveries resume.
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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