Concerns build in market over NAFTA possibilities

Concerns are building in the market over possible changes to the North American Free Trade Agreement, or the possibility it may be dissolved altogether. This would jeopardize an incredible amount of U.S. agricultural exports.

Canada is the United States’ second-largest export buyer, with receipts of $21.2 billion forecast for this year. Mexico is the third-largest, with $19.2 billion in trade. Even if just a portion of these sales are lost it would greatly impact the entire ag market.

Trade is paying close attention to Chinese corn demand and buying habits. Right now corn can be imported into China at a $1.50 discount to using domestic corn. This imported crop would also be higher in quality than most domestic stocks.

Corn processors are hesitant to make purchases, though, as they are uncertain if the corn will be held up in ports due to safety certificate issues. As a result, many are simply paying the elevated price for domestic corn or using alternative grains such as sorghum when available.

We are starting to see a trend develop in Chinese soybean buying. Chinese buyers are only showing interest in soybeans when futures drop below the $10 per bushel mark. This is because that is the value that works best into Chinese crush margins.

This is one of the greatest factors that is preventing a futures rally in soybeans at this time.

The real unknown in Chinese soybean imports is quality. Trade continues to search for clarification surrounding the announcement of Chinese import quality testing. According to the Reuters news service, roughly 50 percent of U.S. soybean exports to China would not meet new guidelines of only containing 1 percent foreign material.

The cost associated with making sure all soybeans destined to China contain just 1 percent is estimated at 15 cents per bushel. Analysts agree that China is making these changes in an attempt to buy high-quality soybeans at a discount rate.

Cumulative U.S. export sales this marketing year are raising many questions. Bookings of both corn and soybeans are trailing last year and bringing into question projected totals. What we could be seeing, however, is a shift in how importers make purchases that will have little if any impact on yearly sales at all.

Buyers used to make large purchases for harvest delivery, then gradually decrease their buying for the remainder of the marketing year. What appears to be happening now is that buyers are spreading out their import purchases, which actually is more of a benefit to a market.

Even with record production figures, the United States continues to import ethanol, which is being heavily questioned. The answer to this activity is that under the current Renewable Fuel Standard, ethanol from Brazil can be classified as an advanced biofuel.

This helps satisfy the volumes of that fuel required for blending. At the same time, the United States exports a large volume of ethanol to Brazil, making the imports more of a swap than a purchase.

Not only is trade monitoring ethanol trade, but that of dried distillers grains (DDGs) as well. Marketing year to date DDG exports to China are a mere 15 percent of a year ago, and just 5 percent of the year before that.

This is mainly from the absence of buying due to safety certificate concerns over GMO content. This feed grain has now started to back up in the domestic market, and pressure soy meal usage.

Trade is already starting to look at new-crop production figures in the United States, with heavy emphasis on corn. Reports from around the Corn Belt indicate farmers will seed more corn acres than initially thought, as input values have started to recede and break-evens are improving on that crop.

This shift in economics is giving corn a $70 per acre better return than a year ago, while soybean returns have only improved by $20 per acre. If anything, this will likely prevent acres from shifting from corn to soybean production.

The real unknown in the corn complex is what will take place in global balance sheets. The world market is expected to have corn carryover of 227 million metric tons (mmts) this year. Next year this is forecast to decline to roughly 205 mmts as we see less production in South America. While this is a sizable decrease, it is not enough to warrant rationing of supplies at this time.

All eyes are on the fund crowd, now that we have started a new calendar year. Not only are we starting a new year, but a new quarter, as well; there are several thoughts this could elevate fund activity in the market, and hopes are that this will bring about fresh buying interest.

This is more of a case since the funds ended 2017 with large short positions, especially in soybeans, where year-end shorts were record-sized.

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 are believed to be accurate.