There is good news for US corn and soybean producers!!! China demand is good, no matter what origin.
The speed that the Coronavirus changed our lives is unprecedented. Without making light of a serious disease. “Going Viral” seems appropriate. This virus went viral!
Current world protein consumption is 500 million tonnes. We know the population story of 2050. Protein consumption could double by 2050, if we have enough protein. What will the mix of proteins look like in 2050? What sector sees the most growth? Are we to assume the world ends in 2050; I never see anyone talking about what happens beyond 2050?
China is Now the Largest Buyer of US Pork – From 4th to 1st in Six Months - That’s a BIG DEAL
China has become the largest buyer of US pork even with large tariffs. Why hasn’t the hog market responded as expected to the ASF issue in China and increased Chinese imports of pork? I will give you two reasons and then why a rally is getting closer. Speculative money got long live hogs in April anticipating large buying from China would push cash hog prices higher. It was a reasonable theory, but the market stalled as hog export shipments didn’t grow according to the specs plan. The spec net long position has been reduced by nearly 50% as the hog market has gone from $102 to $75. The risk of ASF reaching the US and devastating the market has kept buyers away. Hog futures and speculators got ahead of the story.
Normally crop insurance has a propensity for overproduction. These are not normal times. This year it is the opposite. A feature of crop insurance covering nearly 90% of Midwest farmers is creating a paid set-aside which is distorting the grain market. It is forcing the market to bid against the prevented plant (PP) payment to offset the damage created by Mother Nature. The impact is unintentional and is only exposed by the extreme delays in 2019 planting. Those of you under the age of 40, google set-aside policy to see how US Ag programs of the 1970’s and 80’s promoted production for non-US producers. South America is a major benefactor of the recent market rally, as they were back in the 70’s and 80’s. PP forces the market to bid until enough planting is complete. Will planting proceed enough this week or will it push into July? What will Mother Nature dictate? More importantly, what happens to prices once the bidding is done? How many will suffer “Buyer’s Remorse”?
On Friday, May 10th the World Board (WAOB) will publish the first corn and soybean balance sheets for the 2019/2020 crop year. Based on the weather model employed by the USDA, I estimate the initial USDA yield for corn will be around 173 bushels per acre, 3 bushels per acre (bpa) below the trendline yield of 176. The model calls for a reduction of around 2.89 bpa for every 10% the US planting progress lags the average on 5/15. The average planting pace for May 15th in their model is near 80%. Some interpolation/extrapolation will be required. Our analog year is 2013. Planting progress went from 28 to 71% complete from May 12th to the 19th. The corn yield in the May 2013 WASDE was 158, 5.6 bpa below the trendline of 163.6 published at the 2013 USDA Forum. The Westcott‐Jewison model is used for guidance on WASDE yields for May – August reports. The surveyed yields will not begin until September this year. The yield adjustment will likely keep USDA 19/20 corn end stocks around 2.1 billion bushels. The lower yield estimate will keep balance sheets artificially low this summer.
ASF = Bullish Pork
ASF = Bearish Soybeans
ASF = African Swine Fever
If you wanted to create the highest negative impact to world animal agriculture, with the least effort, Chinese pork would be your target. It seems African Swine Fever, knowingly or not, has made that decision.
China has apparently offered to purchase an additional $30 billion of US agricultural products as part of the new trade agreement. That sounds amazing! The additional purchases would apparently encompass ten commodities. I say apparently, because like much of the China trade news, it lacks any detail and substance and leaves us guessing the impact. The impact could be that China is "buying off" the US trade negotiators. "Buying off" is a term used this week by Secretary of Agriculture – Sonny Perdue. So, we ask the question: what does it look like? Would it mean China is buying US corn or wheat? Does it mean China is consuming more – that's what's important – will it be new demand?
At the risk of wearing out sports analogies…
There is a saying in basketball: “The only important shot you take is the next one.” The same is true when making decisions about commodity markets. Here at IAG, we know decisions about markets can be frustrating. There is always doubt when reaching a decision. There is never a black/white decision. Decisions need to be made with incomplete data. Anyone can do it successfully if you think like a top shooter in basketball or a top hitter in baseball. Stephen Curry is one of the best shooters in basketball; he believes every shot he takes will go in – never a doubt, but he misses almost as many as he makes. What does it take to be a great shooter? A short memory and countless hours on the court. It’s the same with commodity buying and selling decisions. The decision maker must accept they will be wrong when measured against the market, but the decision maker can’t let “misses” paralyze their decision making.
Here at IAG, we know farmers wake up with a market position every day. Most traders have a choice whether to take a position. Farmers do not have that choice. They have a position that needs attention and management. It doesn’t mean they have to be active traders. It requires them to be active managers, and proactive managers. I believe most farmers inherently understand the position, but they choose to deal with the position in a myriad of methods. That myriad creates the vast difference in marketing results experienced by the farm population. Results can be improved if they approach the position similar to a money manager or professional trader and follow these basic rules:
USDA Office of the Chief Economist did an early release today of the Long-Term Agricultural Projections. Table below.
The US soybean producer is about to have its first major test of life in Tariffville. Short-term prices will be impacted significantly by weekly export shipments and sales. Typically soybean export shipments peak in Oct and Nov. In the chart above, week 60 on the X axis is Oct 15th. In prior years China was the major recipient, generally taking about 2/3rds of the shipments. Current sales bookings are 16 MMT, 1 MMT less than last year. It's likely the 2018/19 shipment line will be flatter than prior years as sales go to non-Chinese destinations, but the US needs to make hay while the discounts to South American beans are the greatest - that is now. A peak weekly pace of 2 MMT is our goal to support current prices.
By Ben Fisher
First, additional links to more information, including the YouTube video addendum. This year’s footage is in 4k and we got some great views of corn and soybean fields. Some issues were only apparent from the sky, but the bulk of the videos show a well- developed, even crop.
YouTube site: https://www.youtube.com/watch?v=NhNjmHKRC_I&list=PLnBorAJnI_izfTKUC3uHUjwogizr2UL2T
IAG Website: https://iag-group.com/
Crop Tour Blog: https://iag-group.com/blog/iag-2018-crop-tour-update
22 stops, 7 states visited
200 ear samples taken, 66 population measurements, 112k kernels counted 35 soybean plants pulled, 1,459 pods counted
1 John Deere hat acquired
US soybean and corn sales for the 18/19 crop year are nearly double last year’s pace, despite export blocking tariffs, thank you very much. Corn bookings are almost 8.9 million tonnes (MMT) versus 4.4 year ago. Soybeans sales are at 11.5 MMT versus 6.4 last year. (Graph below)
What follows are our notes from the full day of our annual Crop Tour.
You can find additional videos on our YouTube site and our website linked below when we can upload them.
Just as with regular climate, the financial climate is never easy to forecast. It’s tenuous and uncertain - at best. And just when you think the storms have settled, things can shift quickly.
For instance, after Donald Trump imposed tariffs of $50 billion on imported Chinese goods, the Chinese government retaliated by announcing plans to match those tariffs with import levies on a number of U.S. products. Among these products are U.S. soybeans.
With the uncertainty of global events that are beyond your control, it is becoming increasingly important to find alternatives to protect your income. Implementation of a strategy that incorporates options is a great way to hedge against these risks.
Two types of market responses:
Emotional – Market has a large spec soy long. Response is negative – easy to say today.
Old Crop US soy impact:
The USDA Outlook Forum is February 22-23. The crop acreage math points to 1.4 million less corn acres in 2018 vs. 2017. The USDA Long Term Projections had US corn and soybean acres at 91 million each. Leaving wheat acres unchanged YOY, adding 600k acres to cotton, moving soy to 91 from 90.2 last year, leaves only 89 million acres for corn – down 2mm from the Long Term Projections. 89 million puts total area for the four crops at 239 million. 239 million would be the largest Forum number since 239.8 in 2013. 239 is equal to the final planted area last year.
Corn area will be challenged and the IAG Models indicate 91 million acres of soybeans will prove to be just adequate for growing demand. It is likely soybean acreage in the USDA March 30 Planting Intentions Report will be above 91 million.
The US has become the crucial supplier of soybeans to the world. World soybean usage has grown from 277mmt in 2013 to 345mmt in 2017. IAG is projecting usage to grow to 359mmt for the 2018 crop year. That’s over 15mmt growth per year. The US has supplied the largest portion of that growth since 2013. (see chart) Since 2013 the US production has grown 33% faster than Brazil.
US Expansion of Soybean Area Leaves the Wheat Market More Reliant on Russia.
How did we get record inventories of grains and vegoils? World wheat yields at or above trend five years in a row, record US corn and soy yields 3 of the last 4 years, record Brazilian corn and soy yields in 2016, and expanded wheat area and record wheat yields in Russia two years in a row.
Every year for the last four, 2013-2016, WAOB has underestimated the world soybean demand by an average 11 mmt or 10%. Why is it so hard to get the demand side right? All that is needed is to guess China, right? Well, that’s the problem. Much of the growth is outside of China, Europe, and the US. Over 40% of the growth in meal usage in the last 10 years has come from places like Vietnam, Bangladesh, India, and Mexico – see chart above. This is not good news for meat exporting countries like Brazil, the EU, and the US. Tracking all those pieces is a difficult task. The other factor making the guess difficult is estimating supply. Available supplies have grown at higher than trend rates the last three years. There seems to be an unquenchable thirst for soybeans. “Grow them and they will get eaten”. As a side note, WAOB has already raised the 17/18 usage after only three months of estimates.
Here’s a simple solution: first, assume we will produce more because we usually do; second, take the first estimate and add 10%, or use an average demand growth of the prior years. The average demand growth for the last four years is 26mmt. The WAOB estimate for 17/18 has demand growing 18mmt. Look for more upward revisions and lower ending stocks.
The graphic above illustrates another strong ending for the US summer soybean shipping season. (say that fast 5 times) If you have read any of my soybean analyses, you know I don’t believe the US soybean balance sheet is a good indicator of market value. The graph above is a good lead-in to the real story below.
While weather has been the major market factor and will continue to be for at least the next 2 to 4 weeks, by Sep 1 we will start to focus on demand.
WAOB (USDA) has underestimated world soybean imports by an average of 10% (11 mmt) for the last four years. This includes 16/17 as a partial year. Why have they missed it? That’s one of the next stories. One would expect most of the increase or estimate miss to be attributed to China – not true. The increase for China accounts for 36% of the change. The majority of the increase is coming from South Korea, Japan, Mexico, along with many others. To be clear, increase means the amount of change in the WAOB estimate from the beginning of the crop year to the end. The USDA miss may not be a major factor this year when there have been record crops in both North and South America. It could be a major factor for the 17/18 crop. It appears the world soy production for 17/18 will come in below last year by 5 mmt. If imports are underestimated by 10%, or 15 mmt, world carry out goes to 77 mmt vs. the current estimate of 93 mmt. 2015 carry out was 77 mmt, leaving very little margin for error. At the very least, the growing world demand will continue the acreage shift to soybeans, away from grains. My advice: don’t get too bearish on grains and oilseeds.
The volatility in agricultural commodities has disappeared – kind of. Ag commodities are back in their “happy place” of abundance and oversupply, waiting for a weather event. One might expect that the spec funds, aka Managed Money (MM), have left for greener ($) pastures. This is not the case. The data shows they never left. They have however, changed the way they bet.
The change over the last five years has been their propensity to bet on the short side. Take a look at the data – graphs below – the growth in the short side bet is obvious. The graphs show the combined open interest for managed money long and short. The first graph totals all open interest for CME corn, soybeans, soy meal, soy oil, wheat, and KC wheat.
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