For the past several years we have seen ending stocks of corn and soybeans tighten as the marketing year progresses. This year, just the opposite is happening.

 

The market is starting to come to the realization that the United States will have a tremendous amount of corn and soybeans left at the end of the marketing year. Reserves are expected to total 2.3 billion bushels of corn and 435 million of soybeans as we move into the next marketing year.

 

The question for the market is what value is placed on these bushels if they are not needed. Any indication of trend or better yields next year will only amplify this situation.

 

An additional concern for the market with this size of ending stocks is where the inventory will be held. If a farmer holds the inventory and moves it just prior to harvest, it will mean terminals will go into the harvest season with more stocks than usual. If the farmer elects to hold the bushels into next year, it will create a storage shortage across much of the interior market.

 

Either way, the longer a producer holds old-crop bushels, the worse it will be for logistics. One of the most-watched domestic numbers in future balance sheets will be corn exports. These have increased recently, but this demand may be shortlived. Other corn-producing countries are seeing record-sized crops, and these stocks are being offered at a discount to

 U.S. corn.

Some analysts believe this could cause a loss up nearly 750 million bushels in U.S. corn exports. Others strongly disagree, though, and claim current loadings actually point to a 200 millionbushel higher export total.

 

The market is receiving mixed signals from Mexico when it comes to corn trade. Mexico remains a leading corn importer, with yearly bookings up 9 percent from a year ago. At the same time, Mexican officials have announced they are in talks with Argentina to increase corn trade between those two countries, bypassing the United States as a result.

 

It is quite likely that the large U.S. corn bookings we are seeing are a result of forward contracting before any trade regulations do change.

 

U.S. soybean sales remain strong, which is surprising some analysts. It was believed sales would drop off considerably once the South American harvest started. This soybean demand is coming from China, and is the result of slow selling interest out of South America.

 

There are concerns with this demand, though, as loadings are not keeping up with purchases. The possibility of cancelations increases with these large unshipped sales on the books.

 

The firm F.C. Stone has released data that may indicate what size crops can be expected this year and, more importantly, what type of yields will need to be seen to support corn and soybean futures. Since 2011, the U.S. corn yield has ranged from 79-104 percent of trend line expectations. For soybeans the yield range has been 91-107 percent of trend. Given current carryout estimates for corn and soybeans, yields will need to be at the bottom end of these ranges to support futures. In all likelihood, we will need to see crop loss similar to those of 2012 to support futures.

 

Another unknown factor in the market at this time that will impact crop size and futures is acres. Even though just projected, some analysts are questioning the number of acres expected to be planted in the United States, on a whole. Over the past four years the USDA has shown a decrease in total acreage of nearly 12 million acres. The question is where these have went, or if the USDA is simply not reporting them in projections.

 

Seasonal tendencies should help support commodity values. The greatest one at this time of the year is the need for risk premium ahead of the planting and growing seasons. This is true even in a year with large stocks, such as we currently have. Not only do seasonals tend to support futures, but a decline in movement during the planting season tends to support basis.

 

While seasonals may support today’s market, it does not necessarily mean we will see a futures rally. The main factor that will prevent this from happening is the large stocks the U.S. has in reserve, especially on corn.

 

For the most part, the U.S. corn market has found equilibrium given current stocks-to-use. This could easily keep corn futures trading in the sideways pattern we have become accustomed to for the next several weeks, if not months, barring a significant weather event. Farm groups have petitioned the U.S. government for funding to improve the nation’s aging infrastructure. A report indicates groups are asking for $3.2 billion in funding for the Army Corps of Engineers to improve lock and dam systems on U.S. waterways.

 

This money would also be used to help deepen several ports to accommodate today’s vessel sizes. The concern is that without these improvements, the United States will struggle to remain a supplier in the global market.

 

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 variou