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KARL SETZER

Commodity demand underestimated

February 2, 2018
Farm News

The commodity market is currently focusing much of its attention on production and stocks numbers but not as much on demand. This is a situation that could reverse in a short amount of time. Historically, our corn and soybeans demand is not far off from averages, and is consistently expanding. As a result, the market needs high production numbers to satisfy demand. It would not take much of a drop in yields to eliminate our current reserves in today's market.

This is not just a case in grains and soybeans, but in livestock too. At the present time the United States has 8 percent less beef in cold storage than a year ago. Frozen pork supplies are down 3 percent from last year. Expansion and high placements have taken the support away from these declines, but as with grains, it will not take much of a shift in stocks to cause concern in the market.

U.S. corn and soybean loadings are well behind where they need to be to meet yearly projected totals. This is not a new topic, as loadings have trailed expectations all marketing year. This may not be a sign of poor demand though, and could instead be that loadings were not front-loaded as in the past. If correct, we may not see loadings drop off as the year progresses, and end up meeting estimates later on.

The lack of grain and soybean loadings is being verified by low rail movement. Rail movement of commodities was down 2.4 percent last year from the year before. This decrease could also be a sign of how much inventory is being consumed internally rather than shipped for export. It is also a sign of how low farmer selling has been this year compared to those in recent history.

These two stories are having very different reactions in the domestic cash market. One reaction is a tighter basis to try and secure as much inventory as possible. Another however, is that buyers see less inventory leaving the interior market, and know farmers are still holding large volumes of open bushels. This is causing a build in hand to mouth buying and generating basis volatility.

The United States could soon see unexpected demand for its corn in the domestic market. China has recently been buying sorghum for import to avoid the hassle of importing corn. We has also seen more interest in using sorghum oil in the bio-fuel industry as it classifies as an advanced fuel and will help meet federal mandates. The combination of these two factors could easily open the door for elevated corn use to fill the void the sorghum demand creates.

There has been a lot of talk in the market surrounding the quality of this year's soybean crop, mainly protein content. While protein content in soybeans is down this year, it is a trend that has been developing for the past several years. Over the past 17 years protein content in soybeans has eroded from a 36 percent average to this year's 34 percent. At the same time Brazil's protein content has held steady at 37 percent, making their soybeans more attractive in the global market.

The large number of ground piles of corn across the Corn Belt are becoming more of a market topic. This year's corn appears to be taking on moisture while being stored, and corn in piles could see more of this than that in bins. As a result many terminals across the interior market may need to move these piles sooner than they had hoped for. Buyers know this, and the possibility is preventing them from pushing bids any more than they need to at this stage of the year.

There is another factor that is greatly affecting interior basis values right now, that being processor margins. Ethanol margins are break-even at best right now, and in many cases, these are negative. Ethanol plants are showing no interest in pushing bids to buy corn if it means losing more money, and many may opt to slow operations until margins improve. The opposite is true in soybeans, where favorable margins have crushers firming basis values to keep deliveries taking place.

There is a growing amount of talk surrounding the slow start of the soybean harvest season in Brazil. While this will delay Brazilian soybeans from hitting the world market, it will not prevent them from being harvested altogether, and does not mean yield will be loss. Still, it does open the door for additional sales out of the United States in the meantime. This volume may be limited though, as Brazil still has a large amount of old crop soybeans that can be used to fulfill new crop contracts if needed.

Trade is also closely monitoring Brazilian corn sales. At the present time Brazil has only sold roughly 35 percent of its expected corn crop, which is about 10 percent behind the usual amount. Some analysts are taking this as a sign the country will have less corn for export this year than in recent years due to a smaller crop. While this is possible, there is also a chance that farmers in Brazil are simply waiting for higher values before extending sales, same as those in the United States.

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.

 
 

 

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