More interest is being shown in what we could see for corn balance sheets in the May supply and demand report. This report gives us our first look at new crop supply and demand possibilities and tends to have more of an impact on the market than others. Given the number of acres that were estimated at the end of March and the corn yield of 174 bushels per acre predicted in the Ag Outlook Forum, we would see a new crop carryout near 1.73 billion bu. Any yield below this and we could easily see rationing start to develop in the corn complex. This is especially true given already tightening world corn stocks.
One of the most disputed numbers when it comes to corn demand at the present time is feed usage. It appears as though 3.74 billion bu of corn was fed in the first half of the marketing year. This is down from 3.8 billion bu for the same period last year. This means to reach the U.S.D.A. yearly feed usage projection we will need to see record demand for the remainder of the year.
While feed usage on corn is in fact down, ethanol demand is helping off-set its decline. Yearly ethanol demand on corn is running 2 percent ahead of expectations. This has added roughly 100 million bu of corn demand to the current U.S.D.A. projection. The wild card in corn demand remains export loadings though, which are down 200 million bu from expectations.
The same scenario is being played out in the soy complex. Given projected acres and yield we could easily see a new crop soybean carryout that would be 60 million bu under current estimates. This would put new crop ending stocks right at 400 million bu using the Ag Outlook Forum data. One big difference between corn and soybeans is the large amount of old crop soybean reserves that will likely be rolled to new crop.
Analysts are already taking this data and assessing fall storage needs across the Corn Belt. According to research from the firm Advance Trading storage should be more plentiful this year than last given current production estimates. Using projected acreage and trend yields, the only state that might fall short of fall space is Illinois. If correct, this should help to support basis values through the marketing year.
We are seeing a difference in interior movement of corn and soybeans than what was taking place last year. A year ago we were seeing these commodities move from the Western Corn Belt into the East. Higher yields in the East has prevented this from happening this year. This could create logistic issues this fall, as some terminals in the West do not believe they will be empty prior to the start of harvest.
One factor that is impacting all movement right now is high water levels. Flooding is currently being reported on the Mississippi, Illinois, and Ohio Rivers. This has impacted shipping to the U.S. Gulf, and also reduced any interest in pushing for additional purchases at this time. As a result, the slow movement in the interior is not as supportive as it normally would be. Concerns over U.S. soybean sales being cancelled are also limiting what a buyer is willing to pay for purchases at this time.
Trade is closely monitoring China’s corn situation. In recent weeks we have seen China auction government reserves at a considerably lower cost than what was expected. In order for the United States to be competitive with these auctions we would need to see our market drop by 60 cents per bushel. It is believed that China is offering this cheap corn to further avoid imports and help consumer more of their burdensome reserves.
Some economists believe the Chinese corn is being offered at this sharp discount for another reason, that being quality. It is believed that China is sitting on 8 billion bu of corn reserves, much of which is low in quality. Therefore the asking price needs to be very low to attract buyers because of this poor quality. Either way, it makes imports from the United States unlikely until these reserves are consumed.
A big story in the market recently, and one we will continue to hear debated, is the bio-fuel waivers that have been granted to small refiners. These were granted to prevent economic hardships from impacting the refiners. Since 2016 a reported 40 of these have been granted. The question is how many of these refiners really need these waivers, and how many might be taking advantage of the loop-hole. Current data indicates these waivers have prevented the use of 1.6 billion gallons of renewable fuels.
More concern is being voiced over the state of the U.S. farm economy. Data is showing that farm loans in 2017 were up a large 6 percent from 2016. At the same time U.S. farm income is now projected to fall to the lowest levels since 2006. This is especially worrisome for producers across the United States that have already trimmed their expenses to a bare minimum. It is not out of the question that this development could determine what crops are planted on uncommitted acres this year.
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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