The USDA may be overestimating new-crop soybean demand for the United States. In its February Outlook Forum, new-crop soybean demand is expected to cut ending stocks to just 185 million bushels.
The USDA may be overlooking the increased competition we are likely to see from South America, though, where production is 1.1 billion bushels greater than last year. We are also more likely to see normal yields in the United States this year, adding to the nation’s supply.
U.S. corn continues to find pressure in the world market from cheaper alternative grains, mainly for feed. This is even taking place in the United States, where we continue to see wheat used as an alternative to corn in many feedlots.
Buyers are able to substitute wheat anywhere from 8-14 percent under the value of corn. If this continues, it could have a sizable impact on final ending stocks this marketing year. This price spread between corn and wheat depends upon many factors, with one of the main factors being weather.
In the past few weeks we have seen a gradual shift in U.S. weather patterns, which have brought more precipitation to the Corn Belt. If this continues, we could easily see an increase in corn price pressure, and drop it to a value that would again make it the feed grain of choice.
Even with these increased precipitation events it is doubtful corn values will collapse, though, as traders know the majority of the Corn Belt is still suffering from abnormally dry soils.
While exports are negative for corn, the complex is taking support from thoughts that domestic demand will compensate for this. Ethanol margins have again turned positive, with many plants reporting 20- to 30-cents-per-gallon returns.
The window for this profitability remains narrow, though, with most claiming they are only showing positive returns through July. While this may not bring idled plants back online, it could prevent further closings.
Corn planting is getting under way in the United States. This is mainly in the Deep South and, contrary to concerns, planting is running ahead of normal. Louisiana is reporting its corn crop 20 percent planted and Texas claims its crop is 15 percent planted.
There are already thoughts in the market this rapid planting could lead to an early harvest, easing some of the concerns over depleting old-crop inventory this marketing year.
We have seen increased pressure in the soy complex from South American harvest activity. These soybeans are now making their way into the global market, with several vessels being loaded out of Brazil for China in the past week. In just a short amount of time, Argentina will be loading out soybeans as well. It is possible all these soybeans could hit Chinese ports at once.
If this happens and unloadings are delayed, it is not out of the question that we could see U.S. soybean exports delayed, or even rolled to new crop.
Chinese officials have indicated they will increase soybean imports by 4 percent in the 2013-14 marketing year, to a large 65.5 million metric tons. These increased soybean imports are from a 4 percent projected decline in production, as Chinese officials are encouraging more corn planting to remove themselves from the volatility of that grain.
The question surrounding this move is where China will look to for soybeans, as the majority of the business may be done with South American countries.
A recent report shows last year’s soybean crop was higher in oil and lower in protein than in recent years. The crop is reported as having an average protein content of 34.3 percent and an oil content of 18.5 percent.
These changes are being credited to last year’s drought, which affected different regions of the Corn Belt in different manners. What is surprising is in most drought years, soybeans tend to have higher protein levels, not lower levels.
Karl Setzer is a commodity trading advisor/market analyst at Maxyield Cooperative. His commentary and market analysis is available daily on radio, in newsprint and on the Internet at www.maxyieldcooperative.com
The opinions and views in this commentary are solely those of Karl Setzer. Data used for this commentary obtained from various sources are 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.