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Discretionary buying being seen in commodity market
Market Analysis
By Karl Setzer
We are starting to see signs of deflationary buying in today’s commodity market. Deflationary buying is when we see declining demand even with lower product costs. This is the opposite of inflationary buying where consumers remain unfazed by higher values and spending does not slow. One reason for a deflationary market is that buyers simply want to wait and see if coverage will cost less tomorrow than today. Even if it is not, it is still cheaper than it previously was, so buyers show less urgency.
Another reason for lower buying interest is that needs may be met, which is what some analysts believe is taking place. A greater concern is that buyers, regardless if they are domestic or global, simply cannot afford to extend coverage at this time. If this is taking place, it does not bode well for market values.
One exception to deflation in commodity trade has been soy meal. The loss of Argentine supplies has actually caused hyperinflationary buying in the complex. Argentina is the world’s leading supplier of soy meal and oil, but last year’s La Nina drought cut the country’s soybean crop in half. This has created a void in the global product supply that the United States has started to fill and been greatly beneficial to the soy complex. This boost in demand will be relatively short lived though, as in a few months Argentina will have new crop soybeans to crush, even if they come from other South American producers.
Economic data shows inflation in the United States remains at 3.2 percent. While this is above the Fed target of 2 percent, it is well below the 9 percent inflation we had a year ago. Consumer spending has not slowed in the United States, and this is the main factor in the elevated inflation rate. There are thoughts this will change once we are past the upcoming holiday season, and this may be enough to keep the Fed from raising rates in future meetings. A delayed reaction to previous rate hikes may also deter the Fed from future rate hikes.
These elevated interest rates may have more of an impact on production agriculture in the near future than trade is indicating. For one, producers are going to see elevated costs of production, even though input costs have started to recede. When added to lower commodity values, farmers across the United States may need to tighten their balance sheets and lower input use is many times the first step. This is a heated topic as reduced input costs can also lower yields on crop production. Cattle producers are also seeing tighter balance sheets from elevated interest rates even with record fed cattle prices.
Officials in China are now projecting larger soybean imports this year than nearly all other firms, including the USDA. Authorities in China are projecting 2023 soybean imports of 105 mmt, a 15 percent increase from 2022. This is mainly from thoughts soybean imports in the fourth quarter of the year will remain as high as the past three quarters as the country rebuilds its government reserves. This is good news for the United States as storing our soybeans is easier for China as the oil content is lower than Brazilian soybeans.
The question is if this soybean demand will carry into 2024 and some major doubts are rising. The main ones are the liquidation that is taking place in China’s hog herd due to ongoing outbreaks of African swine fever. Poor crush margins and cheaper alternative oilseeds may also limit China’s future soybean demand. What is more important for the U.S. is where these soybeans are sourced from with our market share being predicted at 45 percent.
Other global oilseed importers are taking less product than a year ago, however. One of these is India, which is reporting a 63 percent decline in soybean imports from October to September. India’s year to date soybean imports are down 12 percent from last year. India is also reporting a 47 percent decline in sunflower imports from September to October indicating there is even more oilseed products available for the world market.
A top story in the market is the recent presidential election in Argentina. Javier Milei won the election, and his platform has been to tie the Argentine peso to the U.S. dollar, which he believes will remedy the country’s 150 percent inflation rate. Milei also states he will eliminate export taxes and bring “radical change” to the country’s ag policies. There are thoughts that by doing so, farmers in Argentina will elevate their commodity sales and put more product in the global market. While these are popular statements in Argentina, export taxes generate much of the country’s revenue and this loss would have a negative impact on the entire country.
The November cattle on feed report held some surprises for trade. On Nov. 1, the United States had 11.9 million head of cattle on feed, an increase of 2 percent from Nov. 1, 2022. Placements in October came in 4 percent greater than last year at 2.16 million head. This placement total was under trade guesses though as improved grazing conditions are keeping animals on pasture longer than a year ago. October marketings were listed at 1.76 million head, 3 percent fewer than a year ago.
RISK DISCLAIMER: The risk of loss in trading commodity futures and options is substantial. Before trading, you should carefully consider your financial position to determine if futures trading is appropriate. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results. The information contained in this report is collected from a variety of sources and is believed to be reliable but is not guaranteed to be accurate. This report is provided for informational purposes only and is not furnished for the purpose of, nor is it intended to be relied upon for specific trading in commodities herein named.