As the calendar turned over to May, U.S. weather moved to the front and center of the market’s focus. The dominant feature for the month was the record or near-record rainfall in the central U.S. In the first half of the month, southern Missouri and the adjacent areas were "ground zero," and in the second half, it was the state of Indiana. While planting progress for both corn and soybeans is currently close to average, corn -- in particular -- has experienced some replanting and will end up with some unplanted and failed acres.
While the reduction in harvested acres could be as much as 1-2 million acres from the USDA’s last estimate, we feel there are important offsets which have contributed to corn’s extraordinarily narrow trading range. For the entire month of May, December corn futures traded within a 13-3/4 cent range. Those offsets include: the strong finish to the Argentine and safrinha corn crops; the Chinese corn auctions; and the very comfortable U.S. and world carryouts.
Brazil’s second, or safrinha, corn crop finishes in what is historically their dry season. This year their April and May rainfall were above average and the yield reports from the first fields cut have been very good. Argentina is further into their harvest and their yields are also running well above trendline.
For more than a year China has been focused on reducing their corn inventory in general and their government-owned stocks in particular. This month saw the start of their twice or thrice weekly auctions of government corn stocks. Unlike past years those stocks will not be replaced, bringing tens of millions of tons into the marketplace. In May alone they sold nearly 15 million metric tons (MMT) of corn, the equivalent of the entire South African crop.
In their May WASDE report, the USDA estimated the 2017-18 U.S. corn carryout at more than 2.1 billion bushels, the second highest in 12 years. The world corn carryout is projected to have a more significant reduction, but 70% of that drop is in China and 16% is in the U.S., leaving the rest of the world with only minor changes.
While the central U.S. rains were a month-long event, the western Kansas blizzard was a two-day event that brought 6-18 inches of wind-driven snow to some key wheat producing countries. Reports of snapped stems on wheat which was already heading led Chicago and Kansas City wheat futures to trade 21 and 28 cents higher, respectively, on the first day of the month. Both markets spent the rest of the month giving back those gains and they ended May just a few cents below where they ended April.
The blizzard notwithstanding, U.S. HRW was able to capture some rare “cheapest wheat” business to Egypt in the middle of the month. A fortunate set of circumstances aligned to
allow the U.S. to sell two of the six cargoes that GASC, the Egyptian government’s buying arm, bought that day. The June 16-24 shipment period was too early for our competitors to price it as new crop, and their 0.5% increase in protein specifications effectively eliminated France as a potential supplier. By the end of May business had returned to “normal” as Russia and Romania sold GASC a total of three cargoes for July shipment at $16-$18/metric ton below U.S. prices.
Looking forward, we expect wheat to remain rangebound. Next year’s record 258 million MT (MMT) world carryout provides a more than ample cushion against potential crop problems. At the same time, a 5% price drop relative to corn would allow wheat to capture another 20-25 MMT of world feed demand. Price support will also be found via the Russian government’s 9000 ruble/MT intervention price for Class IV wheat. With the strong ruble and the high cost to move their wheat from the interior to vessels, it will be difficult for Russia to sell wheat below $168/MT FOB. Russia has established itself as the world’s low-price supplier, so a “floor” under their prices will lessen downward pressure on all world wheat prices.
Soybeans were the weakest of the three markets we trade, with November futures ending the month 3.7% lower. The bearish side of the market was soybean meal, which closed 5% lower, while soybean oil was close to unchanged. The break in soybean meal was driven primarily by news out of China. Going back to last fall, China has been buying, importing and crushing soybeans at an extraordinary rate, a full 9% of above last year’s record pace. Unfortunately, their soybean meal demand is only up 5-6% and
the imbalance has finally manifest itself. Soybean meal inventories in China have risen to a five-year high and their soybean meal basis broke $15/MT over the course of the month. With vegetable oil prices flat their crush margins have turned negative. Rumors about cancellations and rolling soybean cargoes forward began to circulate this week and contributed to a bearish tone in United States and Chinese futures markets.
The political scandal in Brazil helped alleviate some of the tightness that had developed in the cash soybean market. The possibility of a Presidential resignation or impeachment caused the Brazilian currency to weaken sharply. As a result, on May 18th, domestic soybean bids in Brazil spiked to a full 10% above the bids of a month earlier. Farmers sold 2 MMT and FOB values backed off 10-15 cents per bushel. In Argentina the peso continued to weaken, so crushers in both countries were able to buy several weeks of crush and to continue to sell soybean meal near the lows of the year.
The weak soybean meal basis in the Americas has been one of the market features this year. Not only do all crushers have good soybean availability, they are also dealing with reduced soybean meal demand in the United States and Europe. A major U.S. poultry producer reported that their soybean meal usage is down 14% this year due to increased usage of DDGs and lysine.
On the soybean oil side of the equation the story remains primarily a political one. The U.S. International Trade Commission and the Department of Commerce continue their analysis of Argentine soy methyl ester and Malaysian palm methyl ester and will make a determination whether either or both of those commodities should be subject to Countervailing and/or Anti-Dumping Duties.
At the same time, Senator Grassley’s Bill to approve a retroactive biodiesel credit and to change the credit from a blender’s credit to a producer’s credit has been introduced in both houses of Congress. The Grassley Bill would be far more bullish for soybean oil futures than would the Duties. The Duties would only impact two commodities from two particular countries and would be subject to a WTO appeal by the countries in question. A producer’s credit would not only provide a generous subsidy, it would also effectively block all imported vegetable oils from being used in the program.