Corn’s Ongoing Dilemma

October 24, 2018 03:28 PM
The paradigm shift in soybean trade that came to light in early 2018 actually began in 2017 as China began lowering the acceptable percentage of foreign material in U.S. imports, Jerry Gulke explains the implications.

This summer, I pointed out the paradigm shift in soybean trade that came to light in early 2018. In actuality, it began in 2017 as China began lowering the acceptable percentage of foreign material in U.S. imports, while not putting Brazil to the same standard. China’s reaction sent soybean prices below the critical $9 support level. Even if an agreement with China happens, it might be too late for the U.S. to regain lost Chinese demand. We need to consider the long-term effect soybeans have on the corn market.

Corn demand was expected to be excellent due to last year’s South American production shortfall. Export sales (future deliveries) and cumulative inspections (grain physically leaving our ports) are both strong.

USDA did not raise export estimates in September, but lowered yield slightly. This left the door open for further increases in corn exports, should yields rise and still keep ending stocks under 2 billion bushels.

From a buyer’s standpoint, you can do a lot with $3.50 cash corn. That pushes the logic feed and corn used for ethanol could increase over time. Should the offer last May by China (rejected by President Donald Trump) to increase $60 billion of U.S. corn, natural gas, ethanol and DDGs be revisited and become part of an agreement, we’ll see a increase in demand and a price-incentive for U.S. farmers to significantly increase corn acres.

This year’s excellent soybean yield might make that job more difficult, as price times yield was profitable even with a lower-than-wanted fall price.

The general perception by global traders is a big drop in soybean acres, as they go to wheat and corn. Soybean prices during March 2019 will have a lot to say about the final acreage mix between corn, soybeans and spring wheat. Fertilizer prices have increased sharply this fall. With working capital tight, lenders might favor less-capital sensitive soybeans over corn, even with a slight profit penalty. If corn acres don’t increase by more than 4 million next year, 2019/20 ending stocks should stay below 2 billion bushels. However, the U.S. soybean balance sheet, without China, will require a 10-million-acre reduction to convince the trade $10 is in the future.

The Upshot.Short-term demand for corn is fundamentally sound. My comments last month regarding the financial disincentive to store soybeans commercially beyond February is still a crap shoot. Snow covering 6 million soybean acres in the northern Plains in October spooked the bears to higher prices nearer the $9 overhead resistance. If we reach an agreement with China, it might still be too little, too late.

If the job of the market is to discourage soybean supply and encourage demand, prices might have more downside if the South American crop is successful. My major concern is the disruption to trade flow caused by tariffs on U.S. agriculture will cause an unthinkable demand reduction in soybeans. Demand destruction is not necessarily about price appreciation but about logistically making obtaining supply difficult. This can cause substitution and demand reduction, both of which China has proven it is capable.

U.S. Corn Export Commitments

Corn leaving the U.S. in 2018/19 is up 150% compared to last year. U.S. corn exports are on track to exceed the past several years.


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Jerry Gulke farms in Illinois and has interests in North Dakota. He is president of Gulke Group Inc., a market advisory firm. Contact him at (707) 365-0601 or Disclaimer: There is substantial risk of loss in trading futures or options, and each investor and trader must consider whether this is a suitable investment. There is no guarantee that the advice we give will result in profitable trades.

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Spell Check

Fort Ransom, ND
11/21/2018 08:03 PM

  Jerry, good article about an important subject. Here in the land of trump, there is hope that we will "win" against those darn Chinese. The self proclaimed stable genius breaks everything he touches. We are however, just kicking the can down the road and at some point we will need the bins for the 2019 crop. Every day that slips by with subpar exports is one we can't really make up. Our predominant market, the PNW, is froze more or less and the idea that almost the entire crop in the upper Midwest could be moved in the month of July, (when we find that we didn't win) is laughable.

Cochranville , PA
10/24/2018 06:22 PM

  Where is this big yield from soybeans you talk about Jerry? And does that include black, moldy, swamped out beans??

Farmer Brown
Somerset, KY
10/24/2018 10:48 PM

  There might have been a relatively big crop grown this summer but there won’t be one harvested this fall. Soybean quality problems are a very widespread problem. Fields are being left unharvested and loads are being rejected at the elevators. But of course the USDA will deny there’s any problems and just remind all of us about how great the crop is elsewhere or in South America or how big the carryover is from last year. Any reason that can come up with to keep it as cheap as they can.


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