Commentary provided by Chad Burlet of Third Street AG Investments
With only one trading day left in February, it’s clear that the spring acreage fight has captured the market’s attention. While old crop corn and soybeans struggled near highs that were set weeks ago, November soybeans and December corn raced to new contract highs yesterday. Through today’s close December corn has gained 21 cents on March corn and November soybeans have gained 52 cents on March soybeans.
On February 18-19 the USDA held its annual Agricultural Outlook Forum. This event always provides the USDA’s first look at the supply and demand for the next crop year. While their acreage numbers were very close to expectations, their carryouts were smaller than the average of analysts’ estimates. Their estimate of the corn carryout:use ratio was 10.3%, which is equal to this year and also the lowest since 2013-2014 and their soybean estimate of the soybean carryout:use ratio was 3.2%, the third tightest ever. Their wheat carryout estimate was 698 million bushels (MB) which will be the lowest in eight years. To achieve these corn and soybean carryouts, the USDA used a combined 182 million acres, which would be an all-time record. Most private analysts are even more confident on demand, so they see even greater acreage requirements for the two major crops.
The market’s job is straightforward: encourage farmers to plant every possible acre and to steal a few extra acres from some smaller crops. Once the crops are planted, strong prices will be needed to encourage farmers to continue to invest in the crop to maximize yields. Crop insurance price will be set close to $4.59 for corn and $11.87 for soybeans. That is a strong start, and it will help farmers get their spring financing.
We’ve written for months about the pivotal role China has played in tightening up all of the world balance sheets. Their imports of corn, wheat and soybeans will each be a new record. Their imports of those three crops plus sorghum, barley and cotton will exceed 161 million metric tons (MMT).
In the February WASDE, the USDA raised their estimate of Chinese corn imports by 6.5 MMT to 24 MMT. Commercial estimates of their current purchases from the U.S. and Ukraine show that they already have 28 MMT on the books. As we sit today, the U.S. has the dichotomy of record high sales and near record low shipments, as a percentage of sales. The risk of China cancelling or switching to a cheaper origin is something that is in the back of many traders’ minds. The world soybean program is in the process of switching out of the U.S. and into South America. For Brazil it has been a bumpy start to their shipping season as delayed planting and a wet February combined to put their harvest pace at less than 50% of normal and their vessel line-up is now more than 15 MMT. They had hoped to load as much as 8 MMT in February, but it appears they’ll only make 70% of that goal.
With a record crop and record prices, Brazilian farmers have understandably sold a record percentage of their crops. Domestic bottlenecks have flared up, but plenty of soybeans are now arriving in the ports. The cash basis for the springtime is 60 cents off its highs and anyone willing to get in a long line-up can now buy nearby soybeans at a discount to the board. Brazilian crushers are enjoying the lower cash basis and it has allowed them to price their soymeal and soyoil much more aggressively while still earning a good margin.
With the tightest U.S. soybean carryout in history and a cheap FOB market in Brazil, the question of the U.S. importing Brazilian soybeans is once again a hot topic. We see that physical movement as the solution of last resort. The first step will be for Brazil and Argentina to take most of the export business in soybeans, soymeal, and soyoil. That will significantly reduce U.S. demand and leave us with only domestic crush to deal with. If that happens quickly, we won’t need imports. If we remain a competitive exporter until early summer, we will have used too many soybeans and imports will be inevitable. With soyoil so valuable, it’s also possible we may import soymeal to help supply the domestic feeders.
What the balance sheets from the Agricultural Outlook Forum told us was that even with good yields and record acres, the markets in the U.S. will be tight for the next 18 months. Brazil and Argentina will need to finish their crops with no major problems, and the U.S. planting and growing seasons must go smoothly. Because of those challenges, we expect the market to carry a significant risk premium for the foreseeable future. If a problem develops in any of the world’s key producing regions, the market will move quickly higher.
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