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Winter’s Length for Oilseeds Hinging on China Pact

Saturday, December 1, 2018
filed under: Marketing/Risk Management

       The USDA made a couple of bullish adjustments to the U.S. corn and soybean yield estimates in their November crop production report and world supply and demand estimates.  They actually lowered the corn yield from 180.7 bu/ac to 178.9 bu/ac. That lowered corn production by 152 million bushels.  Many analysts believe the USDA will reduce the corn yield again in the January “final” production estimate.        
       USDA also lowered the soybean yield by one bushel and will likely make another downward adjustment in January. 
       There was also a “stunner” in the USDA world supply and demand report.  They increased China’s corn stocks estimate by an incredible 173 million metric tons in one report.  That equates to 6.4 billion bushels!  They apparently used numbers provided by China’s government. There had been talk around the market for several months that an adjustment in China’s corn supplies was in the works, but nobody saw a number this big coming.  It is almost the equivalent of adding another year of corn production.
       This move has prompted a number of questions:
  • Where has China been storing these newly found six billion bushels of corn?
  • Is the timing of this massive adjustment in corn supplies a little suspect, considering China has eliminated the U.S. as a supplier of soybeans because of the ongoing trade dispute?  Many analysts believe that China’s corn supplies have been getting dangerously low.  They fixed that with a stroke of the pen.
       USDA also made an upward adjustment to China’s wheat supplies, but it was trivial compared to the adjustment to China’s corn supplies.  China is not an exporter of corn or wheat, so these stocks increases really have little or no bearing on the rest of the world. Big stocks increases do spook the speculative side of the markets, and the funds turned sellers because of the steep jump in China’s supplies.
       The “new” China stocks numbers now result in China holding a whopping 68% of the world’s corn ending supplies and 54% of the world’s wheat ending supplies.
       World corn and wheat ending supplies are very tight when you take China out of the equation. There has been some talk around the markets that the USDA (and others) should publish world supply and demand numbers that exclude China. That would provide a more realistic picture of the world supply situation.
       The China/U.S. trade dispute remains unresolved, although there is some optimism that a meeting between President Trump and China’s president at the G-20 meeting the last days of November could lead to the start of some serious negotiations.  Just that small ray of hope bolstered soybean prices.
       The oilseeds market, especially soybeans, remains bearish with or without a trade deal with China.  U.S. and world soybean supplies are at record levels.  The USDA reduced the U.S. soybean export forecast by another 160 million bushels in their November supply and demand revisions. That pushed the U.S. soybean ending supply estimate up from 885 million bushels in the October report to 955 million bushels in the November report.
       More significantly, U.S. soybean ending supplies were just 302 million bushels at the end of the 2016/17 marketing year and 438 million bushels at the end of the last marketing year. That is a bearish trend no matter how you look at it. The chart below shows this trend.

       Soybean futures have withstood all the bearish stocks and trade news relatively well.  January soybean futures have been hovering just under $9.00, although basis levels continue to be very weak due to the lack of soybean sales to China, most of which are shipped from the Pacific Northwest.
       All of these issues will continue to fuel the conversation about how many acres of corn and soybeans U.S. farmers will plant in 2019.  The extreme side of those estimates are as much as a 6.0-million-acre reduction in soybean acres.  Those acres would go to corn, wheat and other crops, including sunflower.
       We still have most of the growing season remaining in Brazil and Argentina — plus the potential for China and the U.S. to reach a trade agreement.  It will be a long winter for oilseeds markets if no agreement on trade with China is accomplished.                                                       
* Mike Krueger founded The Money Farm, and is now a senior analyst with World Perspectives, a Washington, D.C.-based consulting company.  While the information in this article is believed to be reliable, marketing involves risk, and the author and The Sunflower assume no responsibility for its use.
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