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Established 1988
Commodity Week is a weekly wrap-up of the CME Group grain markets with analysis and guest interviews. The program is generally recorded Thursday afternoons and posted online by 7:00 p.m. central. It airs on WILL AM580 during the 2:00 p.m. hour each Friday. Commodity Week is a production of University of Illinois Extension and Illinois Public Media. Like the daily Closing Market Report, it is hosted by University of Illinois Extension Farm Broadcaster Todd Gleason.
website: willag.org
twitter: @commodityweek
cw260521
Panelists
- Dave Chatterton, SFarmMarketing.com
- Curt Kimmel, AgMarket.net
- Collin Watters. ILCorn.org
Todd Gleason: This is the May 21st edition of Commodity Week.
announce: Todd Gleason's services are made available to WILL by University of Illinois Extension.
Todd Gleason: Welcome to Commodity Week. I am Todd Gleason. Our panelists for the day include Curt Kimmel at agmarket.net, Dave Chatterton of Strategic Farm Marketing, and Collin Watters at the Illinois Corn Growers Association. Commodity Week is a production of Illinois Public Media. It is public radio for the farming world online and on demand at WILLAg.org. Our theme music is written, performed, produced, and courtesy of Logan County, Illinois farmer Tim Gleason. Let's begin our conversation by getting a list of items we might want to take up. Dave, I'll start with you.
Dave Chatterton: Right now there are three main drivers in our commodity trade. Normally this time of year we would be talking about weather, but weather brings up the rear in this situation regarding crop conditions, planting progress, and acreage switching. Certainly we are talking about Iran, specifically the Strait of Hormuz, when and if it will open, and what that will look like for transport and fertilizer. However, the most important thing on the docket is China. The potential 17 billion dollars in non-soybean US ag purchases has the potential to materially affect the balance sheets going forward. It is not a certainty, but we have to factor it into pricing and marketing opportunities.
Todd Gleason: Curt Kimmel, weather, the 17 billion dollars potential in Chinese purchases, what else?
Curt Kimmel: The year of the horse. We are in a 60-year cycle with that, so that is on the back burner. Also, the technical picture here is quite interesting. And of course, as Dave mentioned, weather.
Todd Gleason: I was thinking the year of the horse we might get to the technical picture and see what that looks like. It could be a buck you off kind of thing or let's ride them fast and furious. Collin Watters, from the Illinois Corn Growers Association perspective, we probably need to talk about E15 at some point, but what else?
Collin Watters: There are some other policy issues apart from fuels. As mentioned, the trade picture right now has the USDA with a pretty significant 3.3 billion bushel corn export forecast. That might be a little bit optimistic. It all depends on what is happening in Brazil as well. Things have been slowed down there, so there are a lot of things that could potentially move the market in the next couple of months.
Todd Gleason: I would like to have you lay out this demand picture for me, both on ethanol usage in the United States and what demand looks like from those exports for old crop and new crop. Also, any other things in the livestock sector.
Collin Watters: In terms of ethanol right now, domestic demand has plateaued or is falling. Any movement on E15 could be beneficial, but you certainly wouldn't see a 50 percent increase in corn demand from domestic ethanol demand. In the last few years, most of the demand increases on the ethanol side have been in exports. There is a really big program into Canada, Europe, and parts of Asia. A lot of those markets are interested in carbon intensity scores, which is a whole other policy issue. For other demand, obviously the beef herd is hopefully rebounding. Avian influenza is still an issue. There are some headwinds on the feed side and domestic side.
Todd Gleason: Let me follow up regarding demand for ethanol. You said plateaued or falling, meaning incrementally with the number of miles driven in the United States, because they have continued to go down. We will face some headwinds relating to the price of gasoline this summer. I want to discuss the export market with Canada because the USMCA is up for discussion right now. I think that will potentially have a big impact on the ethanol market. Am I right or wrong about that?
Collin Watters: That is true. The Canadians are by far the largest ethanol export market right now. With USMCA, the other piece is Mexico for grain. Mexico has taken up a third to maybe 40 percent of corn exports over the last couple of years, which is massive. The negotiations and review underway for USMCA are really important. I am slightly concerned that some folks are looking for more significant changes in the USMCA. We will have to see how that shakes out, but in aggregate, the agriculture industry has been very supportive. That is across the board, including the dairy industry. Hopefully we can get past the review and get this extended, but even if that doesn't happen, we will basically go back to an annual review period, which is not ideal.
Todd Gleason: Dave, let's stay with corn and the export market, but draw in the 17 billion dollars worth of agricultural products that the United States says the Chinese have agreed to. It could be corn, soybeans, or beef. What do you think will happen?
Dave Chatterton: It is a topic of hot debate in the market right now. To Curt's point about the year of the horse, if we are talking about corn demand at this point, it is the thoroughbred winning the Kentucky Derby right now. Export sales this week were a 17-week high, which is very unusual for this time of the year. We are well on our way to realizing that record USDA demand of 3.3 billion. If you throw in the potential business for China—as we understand it, these are non-soybean purchases—the 17 billion is set aside for grains, meats, horticulture, etc. If you go back and look at that type of spending from China, adding the roughly 12 billion dollars committed to soybeans, you are talking about 28 to 30 billion dollars in spending. That rivals what we saw during the phase one agreement. For them to accomplish getting close to that 17 billion dollar figure, they are going to have to buy corn. There are simply not enough other small feed grains. Assuming tariffs are lowered and the market opens to private buyers, there are a number of TRQs still available for the year, up to 8 million metric tons. We are potentially talking 300 to 600 million bushels of additional corn export demand from that China deal. If that comes to fruition, you take your carryout and shift demand to South America, but you probably end up with a US balance sheet in corn with ending stocks around 1.7 billion bushels. That may not propel us much north of 5 dollars, but it severely resets the tolerance level we have for any yield decline potential in the US this summer.
Todd Gleason: Curt Kimmel, you mentioned the year of the horse. It is a chance to talk about what the charts will look like north of 5 dollars. Tell me what you are thinking.
Curt Kimmel: Basically, just a lot of volatility in the marketplace. Going into last Thursday and Friday, funds were on sell mode, selling 50,000 contracts of corn, and then they came back in the first part of this week and bought it all back. When you look at the charts, you draw some trend lines and channels. A word of caution: if it breaks out to the downside below that channel line, the funds will be on the sell side. We are getting to a point where there is some psychological price risk; 5 dollars is a benchmark. In order to keep moving higher and pop out the upper end of that channel, we need to get above the 5.05 to 5.10 area. However, looking back at the 60-year cycle for the year of the horse, we had some strength into the early part of the growing season, and then the market turned down and went lower. We are at levels where people historically wished they had sold.
Todd Gleason: On that December contract, I will ask you both this question. Producers have probably been told to be 35 to 40 percent sold. If we have a breakout, likely coming in June or July, how much more do you think they should add to their positions on cash sales or covered sales?
Dave Chatterton: We have producers upwards of 50 percent sold, which is ahead of the last few years. We are going to tap the brakes a little bit and see if we can get that breakout to the upside. The announcement by the White House of this potential additional buying by China effectively acts as a put underneath the market in the short term. It buys us time to see what happens with the agreement, weather, and crop yield. If we assume that amount of corn demand will be there, you would need something like a 187 US yield to get carryout above 2 billion. A 180 yield would put you down at 1.1 or 1.2 billion, which is 5.50 or 6 dollar-plus corn. You have to account for that and make sure you have some risk covered. If we break out to the top side, we incrementally want to start selling up.
Curt Kimmel: There is nothing wrong with having a price floor under this and letting the upside roll. Raise your price floor to 4.80 or 5 dollars, and if it goes higher, keep raising it while staying open on cash sales. A lot of the conversation has been towards crop insurance acting as a put for the downside. That is fine, but for that to kick in and pay off, you need prices to go down to 4.15. If you are not worried about a 70-cent drop, you are okay.
Todd Gleason: Has the industry been chattering since that 17 billion number came out about corn exports?
Collin Watters: It is very unknown right now. That 17 billion would get us close to that 30 billion dollar number, which is roughly the five-year average. The issue with Chinese corn right now is it is expensive. They had some trouble in the northeast, so those processors would likely welcome cheaper corn. US corn right now is still cheap; Gulf bids are a dollar or two under Argentine bids. There is probably going to be more room for processed products like beef and pork. Long-term, I don't know that there is all that much opportunity for Chinese corn demand. The Chinese have been making massive investments in irrigation and infrastructure in the northwest, non-traditional corn growing areas, and they are getting Midwestern yields.
Dave Chatterton: To Collin's point, don't take anything away from that analysis because it is precisely how free trade should work. We need to recognize that geopolitics and politics are trumping economics. China has a lot of corn and supply in general; they are trying to shrink their hog herd, pork prices are at 12-year lows, and they don't want US beef. China wants the US to cut the section 301 reciprocal tariffs, which are currently 24 percent. Cutting that could save them over 60 billion annually. Spending 17 billion on something overpriced to save 60 billion makes sense politically, even if it doesn't make economic sense.
Todd Gleason: It is very clear from the administration that they expect to put in place managed trade, not free trade, between the United States and China.
Dave Chatterton: They have said as much. Economists have a play in the process, but right now you have two global leaders trying to do a delicate dance of getting along while promoting their own ideas. You can throw Taiwan, Iran, and Russia into that mix.
Collin Watters: The reality is that this is politics, not necessarily market dynamics. The Chinese have a centrally planned economy, but the industry has some sway with the government. My personal philosophy is that free trade works, the market works, and managed trade ends up distorting everything.
Curt Kimmel: When you look at the trend of agricultural purchases, we topped out a little over 30 billion dollars in recent years, then came down to 28, and down to 17. The stage is set for them to re-up that over time. However, if they buy US soybeans, that takes demand away from South America. South America has a big crop, so world bean values will be lower. You have to look at the world balance sheet and be cautious of big bullish news.
Todd Gleason: It will be interesting to see, because we know rather than a dollar volume for soybeans, the agreement involves 25 million metric tons for the remaining three years of the president's term, as Jameson Greer noted on Face the Nation. They are going to buy 25 million metric tons, but at what value? Does that get priced into the board of trade?
Dave Chatterton: You could see a way of putting a floor underneath those beans, knowing China has to come for them. China is savvy; they do not want to buy overpriced beans. Keep in mind, they still have a 10 to 15 percent import tariff on US ag products. The market is always forward-looking, and if they feel that demand will be there, they will price it into futures. China recently bought 12 million metric tons of beans that were one to two dollars more expensive than South American beans, solely for political purposes to secure a tariff cut during the October meeting. The trading community will account for that.
Todd Gleason: Does that include 5-dollar corn and 12-dollar soybeans?
Dave Chatterton: For sure.
Curt Kimmel: Those were benchmarks talked about for quite some time. Twelve-dollar beans are getting interesting short-term. We are carving out a head and shoulders top, which technically is risky. But stepping back, there is a good-sized bull pennant. Beans have climbed the wall of worry since last fall. There is going to be a lot of volatility moving forward through the growing season.
Todd Gleason: I want to talk about renewable diesel, sustainable aviation fuel, and how they are related. SAF can be made from ethanol or soybean oil. How does that impact the market for renewable fuels in general?
Collin Watters: One reason the bean market has been supported is the renewable volume obligation announcement. Renewable diesel is a component, sustainable aviation fuel probably less so in the near term. An ethanol-to-jet pathway is five to ten years out. Demand for renewable fuels will likely keep growing, putting a floor under corn and beans. Maritime renewable fuels are probably more realistic in the near term than SAF because shipping lines running on bunker fuel are looking to reduce their carbon intensity. Companies like Maersk are running methanol and ethanol vessels.
Todd Gleason: Maersk did announce this week that it completed a route running ethanol. Regarding RVOs and cooking oil coming from China, how much of an impact do you think that might have on the upward mobility of soybean prices in the near term?
Dave Chatterton: It is a supportive factor. What concerns me regarding upside potential is that crush margins, whether traditional or biodiesel, couldn't be much better—around 2.50 to 3 dollars a bushel. Every plant is running at capacity to take economic advantage. Additional capacity is coming online, but it takes time. It helps us adjust our mix toward domestic usage over the export market, but the ultimate goal for grain marketers is to have both solid domestic and strong export demand bases.
Curt Kimmel: When you look at the supply and demand balance sheet for soybeans, we have a 310 million bushel carryout. If you take yield down one bushel over 80 million harvested acres, you have a very tight supply down to around 200 million bushels. However, the bear is going to say demand is overrated by 100 million bushels. We need China and renewable fuels to ensure that balance sheet stays solid and tight.
Todd Gleason: Let's wrap up our conversation with a final word from each of you. We'll start with Dave Chatterton from Strategic Farm Marketing.
Dave Chatterton: It is always great to be in central Illinois. I have been advising to play defensively when it comes to marketing, but I have shifted my mentality because of the potential for additional China buying. You want to be more opportunistic and look to maximize profit rather than just defending break-evens. Let this play out a little bit. However, one headline can change it all, so remain flexible and make sure an appropriate amount of your farm's risk is covered to a level where you are comfortable. There is more optimism now than we've had recently.
Todd Gleason: Our thanks to Good Spirits in Farmer City for hosting us, and to Curt Kimmel for driving in from Normal. What's your final word?
Curt Kimmel: Dave did a great job summing it up. Each individual has a different comfort zone, so it is a matter of sitting down, pushing the pencil, and leaving your options open.
Todd Gleason: Thank you Collin Watters for bringing your viewpoints from the Illinois Corn Growers Association. What's your final word?
Collin Watters: I am really hopeful we will see a strong market this year. I am watching Brazil's safrinha crop coming off soon to see how that affects things. Regarding logistics, barge traffic has been okay, but the river system is a little low. There is still quite a bit of drought out west and in the Ohio River Valley. Hopefully we have a good crop and can get it to market.
Todd Gleason: You've been listening to Commodity Week from Illinois Public Media. You can hear the program anytime at WILLAg.org or on your favorite podcast applications. Our thanks to our panelists: Curt Kimmel, Collin Watters, and Dave Chatterton. I'm University of Illinois Extension's Todd Gleason.