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US economy is impacting commodity futures

 

While US export sales of corn and soybeans remain well behind last year, trade is split in how this will impact balance sheets. Some analysts are concerned demand is currently over-projected and will be scaled back as the marketing year progresses. Others disagree and believe sales are just slow to build and we will see an increase once our leading competitors exhaust their inventory. Both scenarios are possible, but the longer it takes our demand to build, the more the market will become skeptical of it happening.

South American attaches have revised their soybean production estimates. Brazil is now expected to plant 90.1 million acres of soybeans for a crop of 123.5 million metric tons. These are all larger numbers than a year ago, and larger than what the USDA is using in world balance sheets. The Brazilian attaché expects 75 million metric tons of soybean exports this year with the USDA projecting 76.5 million metric tons.

In Argentina, farmers are expected to seed 44.5 million acres of soybeans, up 500,000 from last year. This will give the country a 53 million metric ton crop, which is equal to what the USDA is predicting.

The US economy remains a source of interest for the market and is impacting commodity futures. We are starting to see more indications of a weakening economy which has some investors nervous. Historically we have seen “safe haven” buying in commodities when this develops, but so far, this has been limited. Instead we have seen investors simply remove their money from all markets until they stabilize. Concerns over world trade talks are also impacting the financial market as much as commodities.

Concerns are being voiced over the possible ramifications of the proposed tariffs on the European Union that have been implemented. Data shows these will impact $3.4 billion of specialty products that the US normally imports for the holiday season. It is also believed that these tariffs could eliminate 13,000 US jobs, mostly in the retail sector. The real concern is that the EU may impose retaliatory tariffs on US goods.

Displeasure is being voiced over the Environmental Protection Agency’s biofuel package that is currently under consideration. Groups including the American Farm Bureau Federation point out how the revised proposal does not limit exemptions to blending waivers as much as hoped and will do little to increase US ethanol usage. The concern in the market is that if this trend continues US corn demand for ethanol will continue to erode.

Economists have released their outlooks for Chinese pork production and how it will be impacted by ongoing African Swine Fever cases. According to the firm Rabobank, the Chinese hog herd has been reduced by 50 percent from ASF. They also believe the country’s hog herd will decrease by another 5 percent by the end of the year. It is also believed that ASF will cause elevated volatility in the global hog market for the next three to five years. Hopes are this will eventually open the door for elevated US pork exports.

Reports from Chinese hog farmers paint a different picture on African Swine Fever than what others have given. Officials have stated that Chinese hog losses from ASF total close to 1 million, but others claim they are much larger. Some believe total hog losses could reach 200 million before the outbreak is under control. These losses have caused pork values in China to rise 50 percent and could cause them to get even higher in the future.

At the same time, some firms are predicting much smaller losses from ASF, which is adding to market volatility.

Some analysts are already looking past the ASF outbreak in China for what it means for future hog production in the country. Given the stricter regulations hog producers in the country now face, it could make the industry much more efficient. It is also likely that hog producers will become more efficient, especially those who are building new facilities. It is not out of the question these changes could make China an even greater player in the world pork market in the future.

The market continues to focus on US and Chinese trade developments as both sides claim progress is being made and an agreement to phase one is likely in the November meeting in Chile. One question this brings up is the possibility of future Market Facilitation Payments. It is believed that the government will send out the 2nd tranche that is expected in November, but the 3rd one scheduled for January will be doubtful if a trade resolution is reached.

This commentary is the sole opinion of Karl Setzer, Senior Commodity Risk Analyst for AgriVisor, LLC. This is intended for informational purposes only and not to be used for specific trading recommendations. The information used to generate this commentary is gathered from a variety of sources believed to be accurate. If you have any questions or would like additional market information, feel free to send an e-mail to ksetzer@agrivisor.com. 

11/7/2019