Trade is already starting to question new crop yield estimates with most interest on corn. The U.S.D.A. just released its initial new crop corn yield estimate at 174 bushels per acre. While this type of a corn yield is in line with recent production years, the fact is we need a yield this high to prevent a drop in reserves given our current demand base. If yield would drop to the levels seen just two years ago this could happen.
There is just as much uncertainty in global corn production, mainly in Brazil. Early on Brazilian officials claimed corn production would be down this year due to the slow planting of the soybean crop and how it would impact double cropping. Weather quickly became more favorable and economics improved to a point where attitude changed and thoughts shifted to higher corn production levels. Brazil has now suffered from a lack of rainfall, which again has analysts lowering their corn production estimates.
Even though just updated, we are seeing heavy debate surrounding corn and soybean demand estimates. Thoughts are the U.S.D.A. is too low in its crush demand on soybeans as cumulative totals indicate a yearly usage above the last projection. While an increase to soybean crush is possible, the real factor in soybean balance sheets right now is exports, which continue to lag. To see soybean carryout increase 200 million bu would not come as a surprise, even with our elevated crush.
The same debate is taking place in the corn complex. Domestic corn demand has been better than expected this year, mainly for ethanol. This has been negated by a slower feed demand and low export loadings. The combination of these two could easily give us a 100 million bu higher carryover on corn than what the U.S.D.A. is currently predicting.
When it comes to ending stocks, the real focus is starting to shift to the global side. Even if domestic usage on corn and soybeans does increase, ending stocks of both commodities is more than adequate. From a global point of view there is a little less of a cushion. This is especially the case on corn where ending stocks have shrunk considerably in the past two years.
A country that is gaining more global attention is China. It has been thought Chinese farmers would plant more fields to corn this year than last due to more favorable returns. The Chinese government is paying better subsidies on soybeans though, which may limit how many acres would shift over. Even if this is just a minimal amount it could easily change China’s soybean import forecast.
There remains a significant amount of uncertainty in the market surrounding the possible tariffs between the United States and China. The answer to this may not come for some time, especially on soybeans. Chinese demand for U.S. soybeans tends to decline from this point forward in the marketing year, so any changes to imports may not happen until we get to new crop. The greatest concern on old crop is that we could see sales already on the books being cancelled.
It is possible that these proposed tariffs will not impact the United States’ exports at all. If China shifts all of their buying interest to South America, it will bring most other soybean buyers to the United States for needs. This has already been seen when the possibility of a tariff was first announced. Any decline in exports could also be consumed by the domestic market, mainly for feed and ethanol production.
It is not out of the question that these tariffs could actually end up being positive for the U.S. market. By China passing over U.S. sorghum it has caused the value of the commodity to decline. As a result, we have seen others buyers step in and make purchases. While this may off-set some corn exports, it will prevent the back-log of grain that was initially predicted. Even if we do not see as strict or as many tariffs enacted between the U.S. and China the thought of them has already impacted trade. Chinese buyers are concerned that they will make purchases of U.S. products and have tariffs placed on them while in transit. This has already caused Chinese soybean purchases to decline to the lowest level in the past four years. Chinese processors are also suffering from these possible tariffs, including hog feeders, who are hesitant to place animals if they are uncertain of feed costs.
When it comes to crop condition, much of the focus in the market is on corn, soybeans, and wheat. A conditions report that should getting more attention is on U.S. pastures. These have a 20 percent lower rating than they did a year ago, which means we could see animals brought into feedlots sooner than normal this year. In turn, we could end up seeing more feed grain demand than predicted.
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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