Concerns are building over the future of the “commodity boom” that has supported the futures market for the past several years. There are now indications that investors are becoming worried over the continued profitability in this market, and may place their money elsewhere.
The main cause of this worry is the state of the global economy and what impact it may have on commodity demand. The likelihood of a recession in the European Union is the point of most concern at present.
It is quite possible that even with today’s projections for record soybean production in South America, global soybean stocks could decline next year from these factors. This is because trade may be underestimating this year’s global soybean demand.
Brazil is going to need a large portion of its soybean crop to fill domestic reserves after cutting into stocks to satisfy demand. China is also using its domestic reserves to limit the amount of soybeans it needs to import at today’s elevated values.
It is possible we could see new-crop soybeans out of Brazil sooner than earlier thought. Planting is running roughly one week ahead of normal on soybeans, and the crops are being planted in near-perfect soil conditions.
There are also reports of farmers in Brazil using earlier-maturing varieties of soybeans, and the combination of these two factors could allow soybeans to be harvested in January. If accurate, this would greatly alleviate concerns over tight global soybean inventory. Mixed signals are being given on corn balance sheets in the United States. Corn demand has been declining recently due to poor or negative margins for nearly every processor and end user.
At the same time, quarterly stocks were less than expected at the end of the old-crop marketing year, indicating a smaller than expected carryout for this year. The deciding factor in this scenario is yield, which has been better than expected in many regions of the Western Corn Belt.
While corn demand has been less than expected in recent months, we may see a shift in buying habits. Wheat values have rallied to a point where corn is actually a more economical feed grain. In some regions of the world, corn has a $40 per-ton advantage over wheat. There are also thoughts the world’s feed wheat supply is running low, so buyers will take corn by default.
Ethanol manufacturing margins across the United States are under considerable pressure. Most ethanol plants across the Midwest are posting a negative return on ethanol of at least 15 cents per gallon. Taking today’s economics and looking forward, it will be over a year before margins turn positive for the industry. As a result, many ethanol plants across the Midwest continue to slow production or go offline altogether.
The question with the reduction in U.S. ethanol manufacturing is what it will do to ethanol stocks. If ethanol manufacturing drops far enough, output will not satisfy mandated blending levels. This could easily lead to increased ethanol imports from South America, which at many times are more economical than domestic manufacturing is, anyway.
What should be a greater concern is how much corn demand will be cut if ethanol production continues to slow.
Trade is already starting to look forward to next year’s growing season weather possibilities. There are thoughts the current weak El Nino will start to fade, and possibly shift back into a La Nina by next spring. If correct, this would likely mean another year of drought for the United States.
While this is several months away, any factor that could possibly reduce U.S. yields will receive market attention, especially in the soy complex.
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.
This commentary is intended for informational purposes only and is not intended for developing specific commodity trading strategies. Any and all risk involved with commodity trading should be determined before establishing a futures position. |