When it comes to global corn demand, one factor is being overlooked. Over the past two years, world corn reserves have tightened 44 million metric tons. This is from a combination of elevated demand and production losses, mainly from drought in South America. Even with higher production being forecast, world corn reserves will likely tighten again this year. This factor alone should support global corn values.
The greatest obstacle for U.S. commodity demand right now is that our offerings have not been competitive in the global market. At the present time an importer can book corn from other sources at a 30- to 40-cent-per-bushel discount to the U.S. For soybeans this spread is from 20 to 30 cents per bushel. When freight advantages are factored in these spreads get even wider.
Wheat is much more competitive with other sources. In fact, U.S. wheat has actually eroded to a point where we could see other producing countries book needs from the U.S., mainly Australia.
When analysts and economists talk about South American competition in the global market, many automatically think of Brazil. While Brazil is a leading competitor of the U.S., Argentina is starting to become more of a factor in global trade. This is especially after this year’s bumper crops that will allow Argentina to up their normal export totals. The main increase is expected to be with China, where after meetings between the two countries it was announced China will up their imports of soybeans and likely meal from Argentina.
End users in the U.S. are trying to encourage commodity movement by using a variety of methods. The most used are deferred pricing tools and free storage. While these are appealing in many cases, a producer needs to be cautious when taking advantage of such offerings. The primary concern is that in most of these contracts, ownership of the commodity is given up. This means that even if futures appreciate, basis risk can be sizable.
Not only are old-crop commodity sales down from normal, but so are new crop. Some elevators report having as little as 5 percent of their normal new-crop bushels purchased at this time. This is especially the case on corn, as the value of that grain has been under break-even for the past several months.
The question is already being asked on what it will take to encourage grain and soybean sales. The obvious answer is higher commodity values. Aside from this, producers have a tendency to wait and market bushels once new-crop production can be better determined.
We are now at a point of the planting season where delays to corn planting start to impact final yields. According to University of Illinois data, corn seeded past May 10 has a yield reduction of 5 percent from trend. If planted after May 20 this reduction climbs to 9 percent. If seeded after May 30, yield reduction is 14 percent or greater. While late planting can in fact impact yields, summer growing conditions can have just as much influence on production.
We are also seeing comparisons in the market between this year and the flood year of 1993. While there are many differences between the two years, some of the similarities are causing concern with yield potential. In 1993 the U.S. corn yield was just 82 percent of trend. In today’s market that would put corn yield around 144 bushels per acre. The greatest concern is if we would see acreage loss with this yield reduction, as it could drop production well below usage.
The same comparison is being made in the soy complex. In 1993 the final soybean yield was 7 percent under trend. In today’s market that would give us a 46-bushel-per-acre yield. This loss may easily be negated by elevated soybean acreage if plantings are delayed long enough.
One reason late plantings have not had more of an impact on futures is the long-range weather models. These are indicating an El Niño system will be in place this growing season. Typically, these bring benign growing conditions to much of the Corn Belt, and above-trend yields are not uncommon. This has many traders believe that once the crops get planted, they will see little stress during the growing season.
Chinese demand continues to be the underlying driver of today’s market. Ever since the outbreak of African Swine Fever began, we have seen erosion to China’s commodity demand. Chinese officials now claim soybean imports this year may only total 85 million metric tons. This compares to the 85 million metric tons being predicted by the U.S. Department of Agriculture. It is quite likely this demand base will be lowered even further. Not only is this an issue for the U.S. at this time, but for all soybean exporters, including Brazil.
Chinese corn demand is also being debated. Chinese officials believe their corn consumption will total 282 million metric tons this year. At the same time, they are predicting a corn production total of 255 million metric tons, even with feed demand being lost. Chinese officials claim they will only need 5 million metric tons of corn imports though as domestic reserves will help satisfy usage.
This commentary is the sole opinion of Karl Setzer, commodity market analyst with 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 989-506-1587 or firstname.lastname@example.org. You can also follow Karl on Twitter via @ksetzergrains.