We have seen a shift in the commodity market that is having negative implications for the ag contracts. Concerns are increasing over the state of the world economy, and how even countries such as the United States and China may soon face financial issues.
The risk with this is that these countries will no longer buy high priced commodities, mainly grains, soybeans and meat products. As a result we have seen investors withdraw their monies from the commodity market, pressuring contract values.
Not all large investors see the commodity market the same way at the current time however. While many have pulled their monies out of commodities, some have actually put more in. They are betting that even if commodity demand holds steady at current levels, production will fall short of usage, especially on grains.
The recent push for corn acres in the United States may have been more for show than anything else. Corn already carries sizably larger revenue per acre than soybeans, which has been causing acres to shift for the past several weeks.

We are also hearing reports that farmers in the Southern Plains are ripping up wheat acres to seed to corn due to poor germination. These two factors may elevate corn acres this year unless plantings are significantly delayed.
There may be long-lasting implications of China’s recent soybean bookings being cancelled, not just for the United States, but for the world market. While China did totally wash-out of several bookings, they delayed the delivery of even more until late summer. This means China may have a full supply of soybeans when the U.S. harvest begins, and we will see additional cancellations at that time as well.

Another possibility of deferring deliveries is that China is concerned over the world soybean supply for late summer/early fall, and wants at least some coverage for that time.

What is most concerning about China cancelling soybean bookings is that they are doing it in today’s market environment. The combination of the weak U.S. dollar and low freight rates are more than enough to compensate for elevated soybean values. This is a sign that China is in fact heavily over-booked on soybeans, as it may actually cost them more to defer delivery than take it now.

Movement of farm-stored grain across the United States has ground to a halt as producers focus all of their attention on the spring planting season. Most buyers took advantage of planting delays to keep their inventories full, so this has had little impact on basis.

The fact that the United States has lost a large portion of its global market share in recent weeks is also limiting basis strength. Even in regions where basis has improved it has not compensated for declines in the futures market.
U.S. ethanol subsidies have again come under fire as a group of bipartisan Senators are calling for their removal. According to the group, the United States can no longer afford to subsidize this industry given our national debt load.

Senators have also asked to have the ethanol import tariff repealed, claiming it would be less harmful to the U.S. economy to allow cheap ethanol imports than high priced crude oil is.

Ethanol supporters were quick to release a proposal to reduce blender subsidies without totally eliminating them. Their proposal calls for a gradual reduction of the subsidies, from the current 45 cents per gallon to 20 cents next year and 15 cents the following year. These payments would then be tied to crude oil values and increase when the price of oil drops. The payments would also be capped at 30 cents per gallon.

All renewable fuel credits and tariffs expire at the end of this calendar year.

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 believed to be accurate.