We are starting to see a division take place in the U.S. cash grain market. Exporters are not pushing for deliveries right now as global demand for our offerings has been less than stellar in recent weeks. Basis values, the difference between commodity futures and cash bids, have weakened as a result. This is mainly from competition in the global market, as buyers can source needs from alternative sources at sizable discounts to the U.S. For corn, this disadvantage for the U.S. has been as great as $20 per metric ton in recent weeks, and for soybeans the spread has reached $15 per metric ton.
The spread between the U.S. and other sources has widened to a point where imports would make economical sense for coastal processors, mainly for corn.
Not only is price affecting U.S. exports, but so is commodity demand on a whole. The most publicized remains the spread of African swine fever in China. A reported 200 million Chinese hogs have been culled in an attempt to contain the disease. As a result, China no longer needs to import feed grains in the volumes they have been. This is mostly impacting soybeans at the present time.
The concern with ASF is that there is currently no vaccine for the disease. Experts claim it will take at least three years for this disease to be contained, and even that is an optimistic time frame.
While global corn demand is not up to original projections, the market appears to be missing the big picture for the complex. Even with a decrease to corn usage, global stocks are still forecast to decrease 26 million metric tons from last year to this year. Even if world corn production does increase from current estimates, it is highly unlikely we will see this shortfall erased.
Interior demand and basis values remain strong, however. For soybeans this is the result of crush margins and a need for soymeal. The loss of hog production in China has elevated export demand for US pork and now that industry is pushing itself to the limit to satisfy demand. This is a fragile situation though, as even at full capacity, the U.S. pork industry will not be able to satisfy all of China’s demand. This will limit how much upside we have to domestic soybean demand, and in turn, how much of a premium crushers are willing to pay for soybeans to process.
Interior corn bids are also much better than usual at this time. This strength is stemming mostly from the ethanol industry as production struggles to get back on line following the March floods in the Midwest. A simple lack of desire from farmers to make sales at today’s values also has buyers and processors paying premiums for deliveries. In several cases this has pushed interior basis values to levels not seen in the past several years.
While we are seeing uncharacteristic strength in the interior cash market, there are factors that have limited basis improvement. One is the fact the Mississippi River is still not fully open for navigation. Typically, the river is fully open by mid-April. Unseasonably cold weather and flooding have prevented the river from fully opening this year though, and sources claim it may be the first part of May before it is. As a result, river terminals have not been pushing for deliveries as they remain full.
Another factor is that U.S. grain and soybean inventories are at record levels. Buyers know this inventory will eventually move, and are willing to limit their bids to quick-ship incentives until it does.
Even where the Mississippi River is open, we are seeing transit issues. The river is still experiencing high water levels that are restricting barge movement. This is not just for grain movement south, but for inputs being brought north. This will become much more of a factor once the U.S. planting season pace increases and input needs rise, mainly for fertilizer.
Harvest is progressing across South America, and as it does, crop size estimates are increasing. Late-season rains were a great benefit for the crops and added bushels to both corn and soybeans. As a result, analysts believe Brazilian soybean production will be second only to last year’s record crop. Basis values have weakened in Brazil as a result, making their offerings even more affordable for an importer.
In Argentina the benefactor has been corn. This is being verified by record Argentine corn exports of 3.5 million metric tons in March and a likely 4 million metric tons of exports in April. As with soybeans, this corn is being offered at a sharp discount to U.S. corn and diverting buyers.
The greatest issue for the world commodity market right now is that we are in a “buyer’s market.” What this means is that global commodity supplies are at a level where we are seeing little urgency in covering needs. A buyer knows there are enough supplies to satisfy demand and are willing to go hand to mouth as a result. Even if a buyer does run short in such a market, they will simply post an attractive basis, buy what they need, then quickly fade their bid again. As a result, sellers need to show no hesitation when it comes to liquidating inventory at attractive values.
This commentary is the sole opinion of Karl Setzer. 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, contact Karl Setzer at 800-858-3738, ext. 411, or at firstname.lastname@example.org. You can also follow Karl on Twitter @ksetzergrains.