By Karl Setzer
We are starting to see a shift in market attention from soybean balance sheets to corn figures. Given the lower acreage numbers being predicted by the USDA and concerns over yields have some new crop carryout estimates down to 1.2 million bu. Even this may be too high if acres shift to soybeans as the market has indicated may happen. Some models indicate the new crop stocks to use ratio on corn could drop to 5% by the end of the 2021/22 marketing year. This possibility is keeping an elevated volume of risk premium in the corn market.
The US economy continues to improve as Covid restrictions are lifted, and as it does, travel is increasing. This obviously brings elevated energy product demand, including for ethanol. As a result, US ethanol reserves are now just 75% of a year ago. We have to remember that ethanol stocks were rapidly building last year as travel restrictions were placed on US travelers. This is still the lowest US ethanol inventory since 2013 and is being closely monitored by trade. The most attention now is if ethanol plants can find enough corn to raise production and prevent further declines.
Soybean values continue be supported by soy oil, and more importantly, the entire vegetable oil complex. Soy oil from the United States is currently being offered at 60 cents per pound. While this is more costly than palm oil which is at 50 cents per pound, it is cheaper than sun seed oil offers at 75 cents per pound. This has kept buyers coming to the US, although we are now starting to see more pressure from South America.
China remains the world’s leading source of commodity demand, but we are seeing mixed signals on their usage. China is crushing fewer soybeans domestically and their overall demand was lowered by 2 million metric tons in the last WASDE report. Crush margins are deep in the red which is limiting China’s processing. China is also importing a larger volume of meal, further reducing their need to crush domestic soybeans. China’s overall feed demand is being questioned as African Swine Fever cases remain high, despite reports the disease was under control.
One uncertainty in this year’s acreage estimates that may have a significant impact on crop size is double cropping. A larger than normal number of producers across the US claim they will double crop soybeans after winter wheat this year, especially if soybean values hold at current levels. Weather improvements across the Wheat Belt may add to this practice. It is not out of the question this could raise US soybean production, even if main crop production is down.
US drought conditions have greatly improved in recent weeks. This has been most notable in the states of Kansas, Nebraska, and Iowa. While improved, these states are still reporting drought conditions ranging from 40% to 80% of area which will need to be monitored, although further improvement is expected. One states that has seen drought conditions worsen is North Dakota where 16% of the state is reporting drought.
South American weather remains a factor in the market, especially for the winter corn crop. The Safrinha corn crop was planted later than normal which in turn means a later maturity. The concern with this is that corn will be maturing during the dry season in Brazil and this impact yields, especially if pollination is affected. Late maturity also sets the crop up to be impacted by frost. While it is questionable as to if these factors will influence yields, any factor that will cause crop loss in South America will receive market reaction, same as in the United States.
Retail meat values in the United States continue to rally. US beef values in March were 107% of a year ago at a record $6.48 per pound. Pork values were 108% of a year ago and poultry was 4% higher than last March. These costs are fueling inflation worries in the United States.
Investors are once again showing elevated interest in commodity futures. This is being brought on by the concerns that commodity inventories will remain tight for the next marketing year and possibly beyond, but from other factors as well. One of the primary ones is the faltering US dollar and how it is not a favorable place for returns. Long-term forecasts for favorable commodity returns is also drawing the interest of investors. Commodities are also being used as a hedge again potential inflation as the US economy continues to recover.
Crush margins remain incredibly high in the United States, and as they do, demand for soybeans is not slowing. Crush margins across the United States are currently averaging between $2.00 and $2.50 per bushel. This is why buyers are willing to pay a significant basis to secure coverage, with bids of $1.00 over Chicago futures being posted. Not only is immediate demand supporting soybeans, but so are concerns over available stocks later this summer.
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