Market Commentary from Kottke Commodities – Commodity Capital CTA – Kenneth Stein

The world grain trade has been shocked in 2016 by the speed with which the entire exportable surplus from a large Brazilian soybean crop was consumed. While statisticians’ opinions differ, the more astute extrapolated  early on from the pace of vessel loading that importers would not only come with equal alacrity  for the U.S. crop next fall, they’d even need to tap more U.S. supplies yet this crop year. In short, demand for soy meal, a high-quality, high-protein feed ingredient key in efficient meat production, is beyond anything anticipated.

Adding soybean meal to feed rations is the critical factor in transitioning from raising chickens and hogs in the proverbial back yard on table scraps to a nutritionally complete formula that dramatically improves animal health and meat quality. That the pace of this food -production transition is so much more rapid than expected directly reflects a continued brisk pace of poverty abatement, of human transition from subsistence to consumer choice, in Asia and elsewhere.

But soybean production in the three primary exporting countries – U.S., Brazil, and Argentina – is not keeping up with this demand growth, and perversely, government policy is mainly responsible. Each country’s government has a different approach to central planning, but all continue to artificially discourage growing more soybeans. Of the trio, Brazil is the least intrusive.

This reduces national income, foreign-exchange earnings, tax receipts, and employment while raising costs for people emerging from poverty. Beneficiaries are politicians and select groups, at the expense of the remaining 99%. One could not be blamed for relating these misguided government directives to others which appear influential in the current reshaping of political landscapes.

This year these policies, and not crop weather, have produced a massive price distortion – too little protein meal and too much feedgrains, driving the ratio between soymeal and corn  to near-historic highs.  In every year crop plantings need to shift from one crop to another in response to price signals as to what is needed more. Any distortion of what should be a direct connection between market demand and farmer planting decisions is counterproductive for exporter and importer alike.

Following bumper winter wheat harvests in the U.S., prospects for the growing corn crop are good. As wheat is in such excess that it’s priced competitively with corn as animal feed, total feedgrain (i.e., starch) supply looks burdensome. That’s ideal for meat production, already expanding sharply per above, to continue and possibly accelerate further. But it will continue to strain supplies of the soy protein needed to complete a proper ration. We expect the ratio of soybeans to corn to make new highs by Nov. 1.

Kottke Associates is a Multi-Manager CTA platform specializing in fundamental-discretionary managers focused on niche strategies within an individual commodity market.