While the data is already over a week old, trade continues to go back to a few of the figures that were released in the Ag Outlook Forum in Washington. The most talked about remain the economic outlooks for U.S. agriculture for the next year.
The United States Department of Agriculture projected average cash values of $3.60 on corn and $8.80 on soybeans for the upcoming year. If correct, given current market conditions and costs, these cash values will lead to negative returns on both commodities. At the present time these cash values would equate to negative returns of $29 on corn and $77 on soybeans in the heart of the Corn Belt.
While there are many variables and these losses do not cover everyone, they are concerning for many. Given these numbers, the USDA is also predicting U.S. farm debt in 2020 to increase to $425 billion, up $10 billion from 2019. The concern is this debt led to a 24% increase in bankruptcies in 2019, and that number may rise again in 2020. The biggest difference between the two years may be that for 2020 there is no plans for a financial aid package such as the Market Facilitation Program in 2019.
There are several factors that will impact these economic outlooks though, with Chinese demand being the main one. The USDA is not incorporating the Phase 1 agreement details into their economic outlooks. This leaves Chinese trade projected at $14 billion, well short of the $36 billion in goods China has agreed to buy. The reason the higher values are not being used is that the exact amount of trade is questionable, as factors such as the coronavirus could easily impact actual trade.
After a very slow start to the year, Chinese soybean purchases from the United States jumped considerably to end 2019. China bought 3.09 million metric tons of U.S. soybeans in December, 44 times more than in December 2018. The easing of trade tensions between the two countries led to this massive jump in demand. This shift weighed on Brazilian soybean sales during December, as those bookings declined by 13%.
Brazilian officials are leery of this improvement in trade between the U.S. and China. Brazil is expected to harvest a record soybean crop this year, possibly as much as 5 million metric tons more than a year ago. Concerns are that if the U.S. and China resume trade, Brazil will see its soybean reserves swell to a burdensome level. As a result, soybean traders in Brazil have been more willing to liquidate inventory now prior to a build in stocks weighs on the market.
As we see the Brazilian soybean harvest gain momentum, we are seeing a spread in offers between that country and the U.S. Brazil is offering soybeans for the March/April time frame at a 15 cent per bushel discount to the U.S. For May the spread widens out to 40 cents per bushel. There is little doubt this will deter some of the buying interest the U.S. has seen recently, including to China.
One reason Brazil can offer soybeans at a discount to the United States is improvements to the country’s infrastructure. The main one of these has been the paving of BR163, the main transit route from northern production regions to southern ports. This route was initially little more than a dirt road, but recent improvements have been made. This lowers the cost of transporting soybeans in Brazil, and in turn, lowers what Brazilian farmers are willing to sell product for.
This shift in demand from the U.S. to Brazil for soybeans is being verified in the transit market. The vessel line-up in Brazil has increased this week with a reported 110 vessels currently waiting to be loaded. It is not surprising that the majority of these are going to be destined for China. Brazilian officials believe soybean exports will hit 7 million metric tons in February, well above the 5 million metric tons from February 2019.
Trade is starting to pay more attention to the world corn supply. At the present time there is a 96-day supply of corn in the world. This includes China’s reserves though, which are highly questionable in both volume and quality. If China is removed from the total, corn supply is just 42 days. We can dial this down farther to show that of the remaining world corn supply, 49% of it is in the United States. It is not out of the question this could make the U.S. the world supply source for corn if global production issues arise.
The U.S. ethanol industry is starting to become a topic on the political front. More opinions are being given on the waivers that have been granted over the past two years. Thirty waivers have been granted during this period to large blenders such as Exxon and Mobile. The intent of these waivers was to provide economic relief to smaller refiners, but many in the renewable fuel industry feel they are being abused and want them repealed.
Doubt is rising over the estimates we have seen on U.S. corn acreage estimates for this coming year. Some of these have reached 95 million, roughly 5 million more than the U.S. planted last year. Wile not impossible, the U.S. will have to see near perfect weather conditions for corn acres to reach this level. Not only will spring weather be a factor on planting, but on the ability for farmers to harvest remaining acres across the Corn Belt. This is especially the case for North Dakota, where an estimated 51% of the state’s corn is still in fields.
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 email@example.com. You can also follow Karl on Twitter via @ksetzergrains.