Spring weather outlooks in the United States are getting more attention. There are concerns over the flooding that has been caused by the rapid melting of snow cover in the Midwest; not only could this impact planting, but also transportation. High water levels can easily halt barge movement, causing low inventories at the Gulf. This could easily cause buyers to look elsewhere for commodities.
As always, we are starting to hear debate on what impact delayed plantings may have on production, mainly corn. History shows that as long as corn is seeded by the end of May there is little confirmed yield loss. This is also the same stage of the planting season where any acreage shift tends to take place.
This said, we will still start to see risk premium added to commodity futures if wet, cold conditions linger in the Corn Belt.
While planting can impact yields, summer growing conditions are just as important, if not more of a factor. We are starting to see indicators lean toward an El Nino system setting up this year, which tends to bring favorable growing conditions to the United States. This could easily negate any less-than-perfect planting conditions.
Another weather topic in the market right now is in South America. Soybean harvest in Brazil has progressed rapidly this year, which tends to bring elevated safrinha acres.
This is especially the case in a year such as this, in which weather has turned nearly perfect in the country. It is not out of the question that we could see larger crop estimates out of Brazil as a result of these weather improvements.
The real focus in South America right now is on Argentine weather. Conditions have been drier than liked in Argentina and may have shaved bushels off yields. While this is possible, trade may wish to wait for confirmation before altering yields.
Trade continues to sort through the latest supply and demand data in an effort to find a spark to ignite a market rally. So far, this simply is not happening – few changes were made to corn and soybean balance sheets, either domestically or globally.
We did see a reduction to world wheat production, but a cut in demand was even greater. Trade is now starting to focus more attention on new crop production, which may be from where a market rally comes.
When it comes to new crop production, the most attention is on acres. Trade keeps talking about a 2 million to 3 million-acre increase to corn production, but current economics simply do not support this theory. Most scenarios indicate unchanged corn and soybean acres, and a few are pointing to elevated soybean production.
The next chance of receiving some type of an answer to this will come in the March 29 Prospective Plantings USDA report. We will also receive the quarterly inventory report on March 29, which may have more of an impact on commodity futures. This is from the fact these numbers are known, not estimates, as the acreage will be.
Trade is expecting to see more soybeans and wheat in storage facilities this year and less corn than a year ago. Stocks on this date tend to be heavily watched as demand for U.S. offerings tends to fade from this point forward, especially on corn.
The commodity that is suffering the most right now is wheat. Global wheat production forecasts have declined in recent weeks, but demand has dropped even further. One good point of this is that wheat is now at a considerable discount to corn in the global market.
As a result, wheat has started to be substituted into traditional corn uses. One of these is feeding in the Black Sea market. While this seems positive, it is doubtful enough demand will shift to greatly affect balance sheets for either wheat or corn.
We continue to hear almost daily reports on trade talks between the U.S. and China. These range from having a new trade deal nearly completed, to thoughts the whole deal may be scrapped. The real question is what trade talks have already done to the markets.
Many commodity importers have already shifted their buying interest away from the U.S. in recent weeks. This is from the impact that even the few purchases China has made has had on basis values. Many buyers can now source needs from South America cheaper than from the U.S. As a result, there is a chance that even if China does resume its buying, total sales could drop.
Another factor that involves China is the African swine fever outbreak. A large volume of hogs have been culled because of this, which will undoubtedly impact China’s feed grain demand. Hog values in China have rallied 14 percent in recent weeks from this, which means feeders will not sit idle for long.
The concern is that the disease is not under control, and more losses will take place.
The global economy is starting to have more of an influence on the commodity market. There are signs of a slowing economy in many regions, with the most attention on China. A slowing Chinese economy tends to bring about less commodity demand. This is obviously more of a concern for soybeans, as China is the world’s largest importer of that commodity.
Karl Setzer is Director of Risk Management for Citizens Elevator in Charlotte, Mich. His market commentary can be found on Twitter by @ksetzergrains and online at www.citizenselevator.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.