What about demand?
Last week, the list of issues facing the marketplace in the near future was supply-oriented. This week, what questions are unanswered regarding demand?
Without a doubt, the largest issue swirls around feed use--for corn and, to a lesser extent, wheat. The USDA only adds to the confusion each year by having a September 1st start to the corn crop year. This year, early corn harvest was very large. The USDA therefore took old crop feed use down 150 million bushels in a preliminary attempt to highlight the fact that new crop corn would be consumed in the old crop year. They raised 12-13 feed use by 75 million bushels. So maybe 12-13 feed use is a 13 month number?
The stocks report on September 28th will answer the old crop feed use question, but it is guaranteed to produce some sort of outrage, since the USDA stocks numbers have typically been substantially under or over pre-report expectations. The marketplace may be getting used to this, however. The numbers could generate a realistic conversation about demand. Yeah, right (yes, this is extreme sarcasm).
The ethanol situation is a whole other moving target. This is a demand category where data comes every week, so it is easy to track. Right now, ethanol production is a little larger than what the USDA projects. The economics of blending ethanol are very good--ethanol prices are substantially below gas prices. The economics of producing ethanol are questionable--spot costs seem to be right around breakeven, while forward costs (3-6 months out) show a loss. Given this situation, how does the market ration corn for ethanol use?
The soybean market has its own set of wrinkles. From a demand perspective, the annual question is “what about China?” This translates directly into US exports. For the crop year, which began three weeks ago, the US has already sold 75 percent of what the USDA estimates for exports. That is a record percentage. If buyers wait too long, there will be no US beans for sale.
World buyers will then need to switch from US to South American beans at just the right moment--and the Brazilians will need to get their early beans moved quickly to ports. The demand situation in the world is that tight. If the US is the supplier of choice in the first half of the year, can Brazil and Argentina meet the needs of customers in the second half? The logistics of moving that kind of volume may be more than the infrastructure of South America can handle.