By Karl Setzer

Trade is closely monitoring U.S. processing margins and placing more attention on ethanol. Current ethanol margins are being reported as high as 80 cents, which is uncommon given the current value of corn. Typically, when corn climbs above $5 per bushel, ethanol margins are negative. The rally in energy values to some of the highest levels in seven years have supported ethanol returns. There are concerns this may correct quickly however, especially if the U.S. economy becomes more unstable.

There is just as much uncertainty on the current soybean crush margin. These are approaching $2 as demand for meal and oil remains elevated. There are also beliefs that the smaller crop in Argentina will lead to elevated demand for U.S. soy products going forward. If this is accurate, we may not see much basis weakness in the soy complex this year even with elevated production and ending stocks.

The real question with these processing margins and strong demand is what impact they may have on U.S. ending stocks. The USDA is already predicting higher domestic usage numbers this year than last in its balance sheets. For ethanol this is 168 mbu and on soybean crush it is 49 mbu. While these are not large increases, until they are surpassed, trade reaction may be muted. This is especially the case with less than stellar export demand.

As planting progresses in South America, more crop estimates are starting to be released. Given recent favorable weather conditions it is not surprising that these are all higher than a year ago. Corn production is now estimated at 118 million metric tons (mmt) for Brazil and 53 mmt for Argentina by most sources. Soybean production is projected at 144 mmt in Brazil and 51 mmt for Argentina.

Not only are South American crop sizes expected to increase, but so are exports. This is especially the case on Brazilian soybeans. Most analysts are predicting Brazilian soybean exports to increase 9 mmt this year. This will only narrow the window for U.S. sales even more than it already has. Looking forward, if Brazil continues to increase its soybean production it is not out of the question the country could become a perpetual soybean exporter, leaving the United States as a back-stop for most buyers.

Moving forward, trade is also showing more interest on future Brazilian corn exports. Brazil has started to produce a 3rd corn crop in recent years, and while small, this is expected to increase in size. This corn production is centered in northern Brazil, which is closer to new export terminals, making it easier to get to vessels and lowering its cost. As this corn production expands, Brazil will likely turn into a perpetual corn producer as well.

There is a lot of talk in the market on the cost of production for corn right now, but that is not the only crop to see elevated costs. Data shows that in Central Illinois, the cost of production for corn is currently estimated to increase $70 per acre this year. The cost of production is also forecast to increase on soybeans by $42 per acre. If both of these continue to rise it may limit overall acreage shifting.

Once again, we are seeing a change in opinion in the U.S. soy complex. Sentiment in the soy complex turned negative when harvest started and larger than expected yields were reported. A drop in Chinese demand and ongoing competition from South America added to the negative tone of the complex, as did larger than expected U.S. soybean reserves.

There are now some thoughts soybeans are becoming undervalued and futures need to rally to prevent acres from shifting to other crops, mainly corn. While this is possible, we also need to remember that Brazil is likely going to produce a record soybean crop this year and generate considerable pressure for the United States in the global market.

Trade is already starting to look beyond the next supply and demand report in December and instead focus on the January publication. January is when final yield numbers will be released, with only usage being changed in December. The most interest going forward is on the soybean balance sheets after a surprising reduction to yield in the November report. Even if we do see a lower soybean yield in January, it would not be surprising to see soybean carryout hold steady or even increase given the lack of demand we are seeing.

One factor being closely monitored in the United States is the volume of fall applied fertilizer we are seeing. Reports from across the Corn Belt indicate more fall fertilizer is being applied as farmers are worried about potential availability next spring. The concern is farmers will not be able to secure needs at any price, or that sales will be rationed. The question this arises is how much nutrient value may be lost over winter.

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