The long-awaited implementation period for the Phase 1 trade agreement has ended and trade is now waiting for indications of actual Chinese demand. While hoped for, it is unlikely we will see a sudden increase in Chinese buying given the ongoing coronavirus concerns. The fact Brazil is considerably cheaper than the U.S. on soybeans is unlikely to bring the U.S. immediate export interest. Phase 1 also failed to erase all tariffs between the two countries, which remains an issue. These will reportedly be repealed in Phase 2, but there is no timeline for when that may take place.
China is starting to show more concern over its commodity supplies as the effects of the coronavirus continue. One most noted is poultry as China has lifted all restrictions on imports. China has avoided most U.S. poultry up to this point on concerns of bird flu being brought into the country. Now, not only is China purchasing processed poultry from the U.S., but live birds for breeding purposes as well. While this is positive news, the fact that unloading delays at Chinese ports are already causing vessels to be redirected is limiting market response.
Thoughts are the worst impact of the coronavirus outbreak may actually be on the energy market. OPEC is projecting a decline in crude oil consumption this year from the outbreak, the first decline in several years. In turn this would likely impact the ethanol industry where demand has already been an issue in recent weeks. Ethanol stocks are approaching all-time highs and this news offers little support for the industry.
Soybean harvest is progressing in Brazil, now reaching the 44% completion mark. As it does yields remain above expectations, with some describing the crop as “exceptional.” The USDA just estimated the Brazilian soybean crop at 125 million metric tons, but analysts in the country claim it could be closer to 126 or 127 million metric tons, and possibly higher. This has slowed soybean buying in the spot market as buyers know they will have ample supplies to choose from in the future, possibly at lower values.
There is more interest being given to the Brazilian corn production estimate of 100 million metric tons. In order to achieve this Brazil will need near perfect growing conditions for the Safrinha crop and these are being questioned. The year this one is most similar to is 2016 when Brazil produced a 98.5 million metric ton corn crop. While not a huge reduction, given the fact Brazil has depleted its corn reserve this year and is currently making imports, it is likely we will see less export competition in the global market from Brazil this year.
We are seeing a sizable build in soybean competition from Brazil, though, which is not uncommon once their harvest begins. Brazilian soybean sales are higher than normal though as currency exchange rates are prompting heavy selling, both from farmers and exporters. The Brazilian real is trading at historically low levels while the U.S. dollar is at its highest level since October 2015. Since the global commodity market is dollar based, this will generate considerable revenue for Brazil. This is why many buyers have gone to Brazil for needs, including China.
Economists in Brazil are not as positive on their long-term soybean export potential. Improved trade relations between the United States and China and a reduction to global soybean demand are anticipated to cut into Brazil’s soybean exports. Last year Brazil exported 58 million metric tons of soybeans but this year that total may be no more than 54 million metric tons.
Corn harvest continues to progress across North Dakota. This has been very slow as winter storms and muddy fields have prevented fieldwork in many regions of the state. As of Jan. 1 North Dakota had a reported 51% of its corn still in the fields, which will need to be collected before any planting can begin next fall. This has some analysts questioning corn acreage predictions for this coming season. The big question with this corn is on quality, and surprisingly, field scouts claim the condition of the crop has held steady over the past few months.
While we do not normally hear about Canadian soybean production, sources in the country announced today they will likely cut back on production this coming year. Canada has struggled with less than perfect weather for soybean production in recent years and yields have suffered. Regions of Canada that would normally produce soybeans at 40 bushels per acre have seen yields drop to just 30 bushels per acre in recent years. Others are struggling to yield much above 10 to 20 bushels per acre. Farmers in these areas will shift production to alternative crops better suited for the regions.
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.