The Global Pond

It’s still early to call the outcome. But what elevator managers and merchandisers can do is begin to adjust soybean trading plans. Areas tributary to the Gulf or that can ship to the PNW may see continued strong export demand for soybeans. Soybean crush plants tributary to ports may be more aggressive if called on to meet increased soymeal export needs.

Soybean basis often peaks in early winter in this country even before our exports begin to slow, offering little net return for carrying hedged inventory. That’s still likely the case for many areas. But elevators that are most directly affected by export demand may find their market doesn’t fade away as can happen when South America has bumper soy crops.

Soymeal value has gained as a percent of soy crush margin in recent months (see chart below), and may rise further. With meal at 47-48 pounds of each bushel crushed, fluctuations in meal demand typically drive the ratio. To the extent that U.S. soymeal exports climb this year, soymeal basis for domestic markets could firm as a result. Look closely at the basis values that crushers will offer for spring/summer slots. Feedlots and other users near the export pipeline may want to lock in some forward soymeal basis. Manage the price risk separately via futures; forward contracts carry extra counterparty risk this year and basis is typically a less costly variable.

Old-crop soybean futures spreads may be quicker to tighten and slower to widen towards Full Carry, on concerns world importers will turn to the United States to meet their needs. Accept good futures carries if you need to hold hedged soybean inventory rather than trying to pick the best opportunity. Old-crop/new-crop soybean spreads are likely to remain volatile as the South American situation changes or clarifies.

Argentina’s corn crop is also at risk. It is the world’s No. 2 corn exporter, and ships over half its production. Argentina holds virtually no carryover by the end of each crop year. Shortfalls in Argentina would almost certainly force overseas buyers to turn to the United States for corn. The impact would be less than with soybeans, however. The U.S. ending corn stocks ratio is around 15 percent and we could easily export more corn without necessarily affecting corn basis or spreads.

The U.S. farmer is always an important wildcard. Tight holding can force basis to rise and heavy selling can weigh on basis – regardless of changes in South America. But that is a shorter-term, localized influence. Major losses in South America can affect everybody that lives around this global pond. Think globally, trade locally.