The announcement that trade tensions between the United States and China have subsided for now are having mixed reactions in the commodity market. For one we do not know how long any tariffs may be avoided, we simply know they are not on the immediate horizon. Analysts are also skeptic of projections for a 40 percent rise in trade between the two countries. Above all, the delay to any tariffs does not include all commodities, as the 25 percent rate on pork trade remains in effect at this time.
Planting across the United States is moving along in full force. Trade is not as much focused on getting the crops planted, but now looking at what impact the delays could have in the future. It is not out of the question that later plantings could push the redevelopment stage of crop growth into late-summer conditions that can be less than favorable. There is also a possibility of a later harvest, elevating chances of an early frost or freeze affecting the crops next fall.
Even though we are moving into the heart of the U.S. growing season we continue to see a minimal amount of risk premium in the futures market. Even though reserves of both corn and soybeans are greater than normal, it would not take much of a shift and we could see these quickly erode. This is especially the case on corn where we are already expected to see stocks shrink both domestically and globally next year.
The real question when it comes to risk premium is how much is needed, or even wanted for that matter. Many cash buyers claim to have enough coverage to last them for the next several weeks and are in no urgency to extend bids for added purchases. Futures traders are also showing little interest in extending their positions much more than they already have. It may take proving to these individuals that we will be losing production this year before buying takes place, especially after the last two production seasons.
More opinions are being released over what we may see to revised acreage numbers in the June update. It is becoming more likely that we will see an upwards revision to both corn and soybeans. These acres would come from wheat in the Upper Plains and sorghum in the South. Delays to planting and better returns for corn and soybeans over wheat and sorghum are contributing factors for the shift.
Trade is keeping a close eye on world soybean economics. This is not just from a demand point of view, but from what could take place to new crop production as well. At the present time the break-even on soybeans in Brazil is around $4.70 per bushel. Given current soybean futures and currency exchange rates soybeans in Brazil are currently worth just over $17.00 per bushel. There is little doubt this will cause further expansion in the country’s soybean plantings.
Trade continues to focus on U.S. soybean sales. We are still seeing record demand for our soybeans in the global market, which is preventing analysts from lowering their export forecasts. It is also believed that the United States will be called upon to help cover the 500 million bu shortfall in South American soybean production this year. While these are positive factors, they may already be priced into soybean futures.
We are starting to see more interest in U.S. corn exports. The United States currently has a record 725 million bu of unshipped corn sales on the books. This is a 38% increase from a year ago. The question in the market now is if this corn will all get shipped or if we will see cancellations similar to what has taken place in soybeans recently. Given the tighter world corn reserves, it is less likely buyers will wash out of those bookings.
Movement of farm stored corn and soybeans remains quite low. This is in part from all attention being placed on spring fieldwork, but also from the fact many producers have moved all of the cash inventory they wish to at this time. It is not uncommon to see producers across the Corn Belt hold back a portion of their inventory until they become comfortable with new crop production possibilities.
As a result of this slow selling, buyers have resorted to several different tactics to try and secure bushels. This is mostly being done by processors who wish to capture as much profit margin as they can in today’s market environment. One tactic many are using is the offering of free storage contracts. While these can be attractive to a producer, commercials have little interest in them, and that is where most movement is currently coming from.
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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