April Balance Sheets Show Adequate Reserves
The April supply and demand report contained a few surprises for trade on the domestic side. Corn carryout increased a surprising 200 million bu as the USDA reduced all areas of usage. This puts US carryout at a comfortable 2.04 billion bu for this marketing year. The USDA reduced soybean carryout a minimal 5 million bu, putting it at 895 million bu. It was interesting to see the USDA increased soybean seed usage by 2 million bu, indicating they may be leaning towards more soybean acres this coming year. Ending stocks of wheat were bumped 2 million bu higher to 1.09 billion bu. Traders are much more interested in the May balance sheets as these contain the first look at new crop numbers.
The global carryout numbers all increased. Corn stocks are now pegged at 314 million bu due to higher US carryout and larger South American crops. Soybean stocks increased 190,000 metric tons to a 108 million metric ton total. World wheat stocks now stand at 275.6 million metric tons, a 5 million metric tons rise from larger crops in the Black Sea.
Global trade policies have been a perpetual headline in the commodity market recently, with the focus being on China. The United States and China have been working on trade issues, and reports are many of the issues between the two have been resolved. The same is not true for Canada and China, where tensions are growing. China has blocked canola imports from some Canadian firms in recent weeks. As a result, canola values have dropped considerably in Canada. Canadian farmers will seed an estimated 10% spring wheat acres rather than canola now, which has weighed heavily upon the global wheat market.
Even with strained relations between the US and China, China has booked soybeans from the US. This has not been a significant volume though, and really not enough to alter current soybean balance sheets. Buyers from around the globe have instead been sourcing soybeans from South America, which are being offered at a 15 to 20 cent per bushel discount to the US. When buyers such as China add in their import tariffs, this spread becomes even greater. The positive news in global soybean trade is that China believes their needs will grow by 3.5 million metric tons this year, helping draw-down our large global soybean supply.
When it comes to corn, most attention recently has been on the growing world supply. US farmers are forecast to plant 92 million acres of corn this year. While this seems like a stretch at this time, that is the number the USDA and most analysts will use in their balance sheet projections. If we do see plantings this high and a trend corn yield, we could easily see a 2.5 billion bu new crop corn carryout figure. While not overly bearish, this removes any urgency in owning corn at this time.
The global corn outlook is for growing stocks as well. This is mainly from elevated production in South America. Improved weather conditions and expanded plantings are going to lead to elevated production in both Brazil and Argentina this year. At this time, officials in Brazil have increased their corn crop projection 5 million metric tons from a year ago, and the Argentine crop is forecast to be 2 million metric tons larger. If correct this would make the Argentine corn crop the largest in the past five years.
What is concerning about these high production figures is the demand side. While global corn consumption remains high, there are now signs it will not be as great as earlier thought. In the global market the focus is on China and what their demand will be following the outbreak of African Swine Fever that has drastically reduced the size of their hog herd.
In the US the worry on corn demand is on the aftermath of the floods in the Midwest. One of these is on ethanol where plants had to shut down due to the high waters, and some have yet to reopen. Another is feed demand as a reported one million calves were lost in the flood waters. Logistics are also an issue, as not only has rail movement been limited, but barges are also struggling to make their way through US waterways.
The fallout from the Midwest floods may be felt in the market for the next several years. The greatest concern is what the impact has been on fields and if they will be planted this year. A greater concern is on stored grain that was lost in the floods. Once grain is subjected to flooding it can no longer be sold into the pipeline. There is also no funding for the loss of stored grain. For some farmers this may mean not only a loss of income from last year’s crops, but reduced income for this year as well.
The greatest concern with the wet weather across the United States is what will happen if it continues. If April remains wet, it will make nine consecutive months of wetter than average conditions across the United States. One side of this is what it will mean for spring planting conditions and possible delays and lower yields. At the same time, this will give the United States plenty of soil moisture once the crops are planted. This may be needed if conditions reverse and turn hot, dry as the growing season progresses.
This commentary is the sole opinion of Karl Setzer. 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 Setzer at 800.858.3738, extension 411, or at firstname.lastname@example.org . You can also follow Karl on twitter; @ksetzergrains