In the past few weeks we have seen a sizable increase in demand for U.S. corn. One demand that is steadily rising is ethanol manufacturing, as weekly production has been running at a record pace.
Another is exports, with more buyers coming to the United States for needs as South America is focused on soybean harvest. While this is all supportive for the corn complex, the fact that U.S. corn reserves are not even close to a rationing situation is limiting upside potential.
One factor that is distorting corn demand is efficiencies, and how a bushel of corn is being stretched further in today's market. This is most notable in the ethanol industry where modern plants are able to squeeze almost three gallons from one bushel of corn.
Many early plants struggled to get 2.5 gallons from a bushel. Breeding has also made for more efficient livestock and better rates of gain.
Trade is becoming more optimistic when it comes to U.S. corn exports for this marketing year. We have seen global demand build for U.S. corn in recent weeks, and it is thought this will last through the end of summer.
Typically, that is when Brazilian production is better known, and we see buyers start to alter their origination sources. Late summer is also when the size of the U.S. crop is better known and buyers can adjust their buying habits according to potential availability.
One factor that has started to impact U.S. corn exports is weather-related shipping delays in the Pacific Northwest. Heavy rains and flooding are hindering U.S. corn exports from that region, and as a result, some buyers are opting to purchase Chinese corn instead.
This is more of a case for the Asian market, mainly Japan. While the delays in shipping are a cause of this, the fact Chinese corn values have dropped considerably in recent weeks is also a likely factor for the shift in buying interest.
The greatest unknown in world balance sheets is South American production. Given the better growing conditions in Brazil this year it is thought the corn crop in that country will be 1 billion bushels greater than last year. Not only will this allow Brazil to rebuild reserves, but allow for elevated exports as well.
This means the United States will need to remain price competitive to maintain the business it stands to gain.
Larger crop estimates are starting to be released for Argentina as well. In the past week, officials have increased both the corn and soybean crop sizes in Argentina by 2 million metric tons.
There are now thoughts the same could take place in other South American countries as harvest advances.
There are analysts who believe the recent uptick seen in corn demand should be receiving more of a reaction in the market. The primary reason that is has not is that U.S. ending stocks are still projected to total more than 2.3 bb this year.
Until we can drop carryout below the 2 bb level, it will be hard to sustain a long-term rally in corn futures. This will likely have to come from a production scare in the global market rather than elevated demand.
Same story for soy
The same opinion is being voiced in the soy complex. Soybean demand is running at an elevated level and ending stocks will likely be lower than current estimates. In fact, a soybean carryout of 350 million bushels is possible this year compared to the current 420 mb prediction.
The reason this number is not receiving as much attention as hoped is that it is still well-above last year's 197 mb of ending stocks.
Even with these increases, trade is still cautious of pressuring futures, especially on soybeans. While trade does not foresee soybean reserves being cut in half from now until the end of the marketing year as it was a year ago, there are legitimate theories that it could be next year.
This is particularly true if we do not see acres increase as much as forecast. It is not out of the question we could see soybean stocks drop to a rationing level next year, especially if any production issue develops.
A development that is affecting the soy complex is elevated use of distiller's dried grains in the domestic market. The latest data from the crush industry shows U.S. soy meal consumption in December was down 84,000 tons from November, and 60,000 tons less than December 2015.
This said, cumulative meal disappearance for the marketing year is still 2.8 percent greater than last year, but trails an expected 3 percent growth in demand.
The changing basis
Historically we have generally seen basis values move across entire regions at one time, albeit up or down. This has now changed, and we are seeing basis values move at specific locations rather than entire regions.
We are also seeing much narrower windows of opportunity when it comes to basis incentives.
Karl Setzer is a commodity trading advisor/market analyst based in the West Bend office of MaxYield Cooperative. He can be reached at (800) 383-0003.
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.