Commodities Report
May 15, 2018



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Corn and soybeans were unchanged over the past week, while wheat was weaker.  USDA released their monthly US and world demand numbers on May 10, which included their first estimates for the 2018/19 crop year.

USDA predicted the carry outs (CO) for Aug 31, 2019.  That's a long way off.  We don't even know acreas, let alone yield.  What will demand be, and crops around the world?  There is so much uncertainty, yet USDA comes out with numbers which we're supposed to believe?

The US corn cO was put at 1.68 bln bu., down 500 mln bu from last year, or 23 percent.  They used a 174 bu yield on 88 mln acreas.  With slightly lower demand, the CO to usage ratio would drop to 11.5 percent, down from 14.8 for the past crop, and the lowest since 2013/14.

The soybean CO for the crop being planted was lowered to 415 mln bu., compared to 530 mln for the past crop, or 22 percent less.  Traders thought it would be 541 mln., so the report should have been bullish.

It is interesting that they raised projected US soybean exports by 225 mln bu. from last year, or 11 percent.  This, despite all the talk about China tariffs etc.  In fact, USDA expects China to import 103 mln mt this crop year, versus 97 mln for the current crop year, as their demand conitnues to grow. 

Getting back to current news and reality, Argentina is in a big mess.  Their drought not only caused serious yield losses, but also poor quality beans.  That is why they are buying US beans to make soybean meal, which they are oversold on.

Their currency, the peso, was worth 6 cents versus the US dollar a year ago.  Now it's 4 cents, and collapsing, as it is down 18 percent since the start of May.  Inflation is rampant, and they raised interest rates to 40 percent.  They have requested a $30 bln bailout from the IMF.

The peso drop helps basis there, but makes farmers even tighter holders.  Why turn a hard, liquid asset into a currency that's collapsing?  Hopefully the Argentine situation doesn't spread to other seriously indebted nations also.

It is hard to believe that it was 10 years ago when the US banking crisis nearly caused a world financial meltdown.  The US government spent nearly $3 trillion to revive the patient.  Thsi was supposed to be paid back, but never was, and merely added to their debt, which now exceeds $21 trillion. 

The fallout also caused interest rates to plunge to their lowest levels in a generation.  Rates hit their absolute low in June, 2012, and have been working irregularly higher since, albeit at a very slow pace.  The increase in rates has been accelerating over the past 2 years, however.

Rates were able to stay low because deflation reigned.  Prices of commodities, real estate and many other assets were weak.  Deflation now appears to be coming to an end.

History shows that when deflation gives way to inflation, commodities are often the leaders in this process.  Crude oil prices are often the main contributor, as it is an input into nearly everything produced.  Curde at nearly 71 is up 25 percent since February.  

USDA says the carry outs on grain will drop significantly this year.  They may well be right.  However, there is no doubt grain prices would not be where they are today except for the world transitioning from deflationary environment to a more inflationary one.

- Frank Backx, Hensall Co-op Grain Marketer