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Views and opinons: Chinese pork losses not long-term bullish for U.S.

There is an old market adage that “low prices cure low prices.” While it is premature to say that low prices have cured our depressed markets, there are signs they are in fact doing their job. Farmers in South America are already starting to make plans for next year’s acres, and low futures are discouraging expansion.

If soybeans are not above $9.50, farmers do not expand acres nearly as much as in years when they are higher. That is not to say that we won’t see additional soybeans planted – just that expansion will be minimal. In turn, this means fewer soybeans for the United States to have to compete with in the global market.

The spread of African swine fever remains a predominant market factor, both domestically and globally. So far, the disease has caused a reduction in China’s hog herd of a reported 40 million head. This equates to roughly 30 percent of its herd.

Economists believe this will lead to an increase in pork prices in China of 70 percent. While this is possible, the actual total will depend heavily upon imports, and if these can satisfy demand. The knee-jerk reaction to this story is that it would be bullish for the U.S. market, both for pork and feed grains.

While Chinese demand will in fact help support the U.S. market, the long-term impact may be neutral at best. This is from the fact the United States can only produce and export a set volume of pork in a year. If China buys and drives up pork values, we will undoubtedly see other buyers back away from our offerings.

It is also unlikely that the increase we will see in pork exports will compensate for the feed grains we currently export to China.

One non-traditional buyer that analysts are watching the closest is the Philippines. We have started to see Philippine imports of feed grains, as the country expands its pork and poultry industries. While it is doubtful they will be able to cover all of the expected loss in business with China, even a portion of it would be beneficial to market values.

Market analysts are starting to more closely monitor domestic commodity demand. This is mostly on feed demand for corn, as the current rate of usage does not support our yearly projection. The USDA believes 5.3 billion bushels of corn will be used for feeding this year.

In order for this to happen, we will need to see a record 1.2 billion bushels of consumption this quarter, which would be a 30 percent increase from the same quarter a year ago. This seems unlikely, as last quarter’s corn usage number was down 21 percent from a year ago.

For soybeans all attention is currently on crush. So far this year the United States has crushed 1.17 billion bushels of soybeans; this is up 4.4 percent from a year ago. While this is positive, we may only see a total increase in soybean crushing of 45 million bushels on the year. This is because crushers are already running at full capacity to capture high margins and there is little room for expansion.

There is just as much unknown in the global balance sheets right now as there is on the domestic side. The main area of interest is on Canadian wheat plantings.

Canada and China are in the midst of a trade dispute, and China has banned some Canadian canola imports, as a result. In turn, Canadian farmers are going to cut back on canola plantings by 10 percent this year, as they are concerned with demand outlooks. It is believed Canadian farmers will plant wheat instead, which is not what that market needs given current global stocks.

Another region in the world being closely monitored is South America. Normally we see trade focus on South American soybean production, but right now the attention is on corn. South American countries have experienced near-perfect weather conditions to finish out their growing seasons, and field scouts have raised their crop forecasts, as a result.

It is now believed South America will produce 149 million metric tons of corn this year, 30 million tons more than a year ago. This is the equivalent of adding 1.2 billion bushels of corn to the world corn supply.

There is another story developing in South America that is starting to garner market attention. This is soybean quality, mainly in Argentina. Argentine soybeans are reportedly lower in protein this year than most, as experts claim the crop was not stressed.

Research shows that soybeans tend to have higher protein content in years with stress during the growing season. If this is an ongoing issue, it could limit what an importer is willing to pay for Argentine offerings, and favor the U.S. in the global market.

 

Karl Setzer is Market Analyst for Growmark, Inc. in Bloomington, Ill. His market commentary can be found on Twitter by @ksetzergrains and online at www.growmark.com

The opinions and views in this commentary are solely those of Karl Setzer. Data used for this commentary obtained from various sources are believed to be accurate.

5/9/2019