We are starting to hear some questions in the market that may bring a change in attitude. We have seen a considerable amount of interest on production recently, but not much on demand. Demand has been good on U.S. grains and soybeans but appears to be falling short of projections. As a result, some economists have started to lower their demand figures in balance sheets. While not substantial, we could see at least a portion of our lost production negated by lower usage.
These thoughts on demand are not just on exports, but on domestic usage too. The most talked about is ethanol, as margins are deeply in the red for most production facilities given the recent spike in corn and unsteady energy market. A portion of this is being offset by elevated feed demand due to higher livestock numbers.
Even though planting has not even concluded, we are already seeing some analysts make plans for this year’s U.S. harvest. The main question is how much storage will be needed for the crops. At this time, it appears yield loss will prevent a storage shortage from taking place this fall. This is especially the case in the Eastern Corn Belt. The real question is how much movement we may see prior to the harvest season, as farmers continue to hold a large portion of their old-crop inventory.
Of course, when it comes to storage needs, the ultimate deciding factor will be yields and production. Some analysts have already shaved 1 billion bushels off this year’s corn crop from both lower yields and a loss of acreage. While this is a possibility, it seems like a large cut to production at this time. Other analysts believe the corn crop has only lost 300 to 400 million bushels of production, which would still hold new-crop ending stocks close to 2 billion bushels. While a reduction, this is not what would be considered a bullish number.
The real unknown when it comes to yields is on soybeans. While soybean yield is very hard to predict, recent weather conditions have not been favorable for production of that crop. The main concern is the lack of sunlight the crop may be subjected to. Soybean yield is heavily determined by the amount of sunlight the crop receives. Thus, the more sunlight the higher the yields. Soybean yield is also heavily influenced by late-season growing conditions, which has given us our record crops in recent years.
Trade is starting to release estimates for what we may see in the acreage revisions that will be released at the end of the month. There are many analysts who believe we will see an increase in soybean plantings and a decrease in corn plantings due to spring weather. While this has undoubtedly caused some acres to shift, how many may be overstated. This is because of the new crop price ratio that heavily favors corn production over soybeans. At the present time this ratio is at 2:1, meaning it takes just 2 bushels of corn to equal the value of one bushel of soybeans. Typically, this spread would need to be closer to 2.5:1 to encourage soybean plantings.
There is a different opinion when it comes to plantings that is getting more attention. More producers across the Corn Belt are stating that they are more likely to continue planting this year given the recent rally in futures. Most claim that if they can lock in $4 corn and $8 soybeans they will continue to plant. This is especially the case with the Market Facilitation Program payments that are expected.
The U.S. is struggling to get its crops planted, but in Brazil, harvest of record-sized crops is taking place. Soybean harvest has all but wrapped up in Brazil and crop size is pegged at 116.2 million metric tons. This compares to last year’s record 119 million tons of production. The country’s corn production is projected at 100 million metric tons, mainly from a record Safrinha crop. The question in Brazil now is if plantings will expand this year due to higher values and ongoing favorable weather conditions.
The U.S. trade issues with many of its traditional customers is having more of an impact than just grains and soybeans. We are seeing these worries surface in livestock as well. The most talked about is on pork, where the U.S. is not seeing the Chinese demand that was hoped for given the African Swine Fever losses in that country. Instead, China is opting to take pork from the European Union, and has opened the door for more imports from Brazil if needed. The question now is if this will create a void for other buyers that the U.S. can fill.
There are also concerns over meat demand in the U.S. The same cool, rainy weather that has delayed fieldwork in much of the U.S. is also deterring a high amount of grilling demand. There is plenty of time for this demand to surface, but given large livestock numbers in the U.S., it will not take much of a decline in usage to see meat supplies increase.
This commentary is the sole opinion of Karl Setzer, market adviser for AgriVisor. This is intended for informational purposes only and not to be used for specific trading recommendations. The information used to generate this commentary is gathered from a variety of sources believed to be accurate. If you have any questions or would like additional market information, feel free to contact Karl at firstname.lastname@example.org. You can also follow Karl on Twitter via @ksetzergrains.