As we prepare for the month of May, it appears that the relative calm that we have enjoyed is about to end. We might even describe the last four months as ones of extreme calm. For soybeans, we had the narrowest January through April trading range since 2001; and for corn, it was the narrowest range since 2006. In fact, corn, wheat, soybeans and soy products all ended April within 1.5% of where they closed the month of March.
We expect the calm to end because the United States is experiencing some very difficult weather and speculative positions are record- or near-record large in several commodities. In addition to that, politics, currencies and international trade relationships are asserting themselves into our markets to a degree that we have not seen in over a decade. Interestingly, these factors have often offset one another over the past month, but it is unlikely that they will continue to do so. And, lest we forget, the key six months for the northern hemisphere growing season have now begun.
As wheat started the month of April it was trying to deal with a record world carryout and a U.S. carryout of over a billion bushels. We saw three possible solutions for U.S. wheat: 1) for the U.S. to capture some “cheapest wheat” export business into the Middle East or North Africa; 2) for wheat to become competitive in domestic feed rations; or 3) for carrying charges to become wide enough so that farmers and commercials would be happy to carry the entire crop. What we saw during April was a combination of all three. HRW filled several of the optional origin sales to Algeria. New crop HRW cash bids dropped below $3 per bushel in several areas, which placed them far below corn. And new crop carrying charges widened considerably in both Chicago and Kansas City.
We now find ourselves in a more supportive price environment. U.S. wheat acres are nine million less than two years ago, and key producers like Australia and Russia will lose 7 – 9 million metric tons (MMT) of production simply by a return to trend yields from record yields. The planting difficulties in the northern U.S. and Canada, along with the frosts, snow and flooding in winter wheat areas, could prove pivotal in finally tightening up the U.S. and world wheat balance sheets.
The corn market presents a somewhat more balanced picture than wheat. Record South American production, the new corn policy in China, and the record world
The European Union continues to lag projections. This is due to cheaper protein alternatives like wheat and DDG. As a result, we expect the May WASDE to show a 15 million bushel reduction in U.S. crush and a 30 million bushel increase in U.S. exports. Logistically Brazil and Argentina have performed extremely well, but U.S. farmers have been more aggressive sellers of soybeans than have South American farmers. This has allowed the U.S. to be a competitive exporter far longer than anyone expected.
Another place where we find politicians and bureaucrats are in the biodiesel market. The Biodiesel Board has asked the Commerce Department and the International Trade Commission to impose Anti-Dumping and Countervailing Duties on Argentine Soy Methyl Ester and Indonesian Palm Methyl Ester. At the same time, Iowa Senator Grassley has introduced a bill with a producer’s credit which would not only give the industry a subsidy but would also render the imported products ineligible. That would certainly be supportive for U.S. soybean oil, but it would actually reduce total world vegetable oil demand. It would move sourcing from overseas markets that use 100% vegetable oil to the U.S. market where only 50% of feedstock comes from soybean oil.