By Karl Setzer
An underlying factor in today’s trade remains the spread of Covid-19. Several states have now enacted restrictions on non-essential travel and dining. We are also starting to see more schools and events cancelled across the United States. The concern with all of these is what their impact will be on commodity demand. The obvious is that if travel drops off, we will again see energy demand falter as well, and in turn, a reduction in demand for renewable fuels. This comes as ethanol manufacturing was reaching its highest levels since the initial Coronavirus outbreak took place.
We are also seeing questions on commodity demand if schools and restaurants close down again. While at-home dining offset some of the losses from initial restrictions, trade is questioning how much of that will continue without a government aid package. If consumers are not comfortable with their finances, spending on food products can be greatly affected, especially when it comes to the meats. In time of economic uncertainty consumers tend to opt for cheaper food products. While the promise of a vaccine for Covid is nearing, until it can be fully accessible, these worries will continue.
A story that has been visited several times recently is what impact current market values will have on new crop acres in the United States. There are several who believe we will see a considerable shift from corn to soybeans given the recent price spread, but numbers may be exaggerated. Some forecast a shift of nearly 7 million acres, and while we have seen this great of a volume in the past, recent history does not indicate we will see that many altered this year. Current models indicate the numbers may be closer to 6 million, and even then, it is questionable. Given recent balance sheet changes the US may need an additional 10 million acres on a whole, which may be hard to obtain.
Brazilian producers have already marketed a reported 55 percent of this year’s soybean crop. This is considerably higher than average as record returns were seen following currency exchange rate changes. Many of these sales took place prior to the recent rally we have seen in soybean futures though, and many are now wanting to renegotiate contracts. This may prove to be difficult as not only do Brazilian farmers outright sell soybeans, but many barter with them for inputs.
US soybean sales for export are starting to be monitored. The USDA is currently projecting marketing year soybean exports of 2.2 billion bu. Some analysts feel this number will be higher though, and possibly approach 2.3 billion bu. While this is only a minimal increase, it would drop new crop ending stocks below 100 million bu. We have already started to see usage rationing though, and our demand will likely decrease even more once the South American crop becomes available.
Brazil has seen its corn values in recent weeks climb to record levels. Corn in Brazil is now at the $7 per bushel level and nearly equal to the cost of US imports. This generates ideas that Brazil will soon be turning to the US for corn coverage. While possible, currency exchange rates may prevent sizable corn sales from happening. Buyers in Brazil are also showing concern over GMO content in US corn and what it may do to their domestic market.
While Brazil has bought some US soybeans for import, sources in Brazil claim sizable soybean imports are unlikely given the logistic issues they bring. Not only do the soybeans need to be unloaded once they reach Brazil, but then trucked a considerable distance to a crush facility. This adds cost to the import value and makes them uneconomical. Same as with corn there are also worries over GMO contamination with US soybeans and further reducing the desire for imports.
We are starting to see mixed opinions when it comes to the Brazilian soybean crop. Several private analysts are projecting the crop at 135 million metric tons which is line with official projections. Others are not as optimistic though and believe delayed plantings and weather conditions for the area that is already seeded will trim crop size. These estimates range from 127 mmt to 130 mmt, and while this does not seem like much of a reduction, will alter the global soybean balance sheets.
We are also seeing updated estimates on the Brazilian corn crop. Most analysts have the crop projected at 110 million metric tons which is in line with official estimates. Many are quick to claim the crop could be trimmed lower however, as delays to the soybean plantings are also likely to delay the planting of the Safrinha crop. This could push the crop into the dry season before it is fully mature and trim bushels. That said, record corn values in Brazil will entice farmers to plant as many acres as they can.
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