Markets UnPACKed: Areas of Demand
Areas of Demand
It is hard not to get sidetracked this week by the three letters GME, which were so unassuming before, but let’s focus our attention on actual demand markets. This week, near month corn futures rallied 20 cents, or 4%, to 532’2; near month soybean futures rallied 30’6 cents, or 2.42%, then another 2% on Tuesday, to close at 1379’6 Wednesday afternoon.
We have continued this demand market since October. This week we will discuss the areas of demand. Our first area is government concerns. Export sales to China last week re-ignited concerns around tightening U.S. and global grain supplies. On January 26, it was announced U.S. private exporters sold 1.36 million tons of corn to China over the weekend. This is a huge transaction for this time of year.
Tightening grain supplies is leading governments to act. Like Russia’s move to tax wheat exports, Ukraine announced it is limiting corn exports to 24 million metric tons. The USDA had the country’s exports around 29 million while other analysts estimated 25 million metric tons. This limit may not be a big announcement for global corn supply but does point to continued government concerns globally regarding increased feed prices in cattle and poultry. This is increased demand as a precautionary measure. Argentina is seeking to ensure internal wheat supplies, as they are the sixth-largest wheat exporter globally. Argentina’s government had threatened to limit corn exports, but this did not occur.
We cannot discuss this bullish demand market and ignore ethanol. In December, we saw ethanol plant margins fall as low as -37 cents/gallon, continued growing stocks, and the nation’s oldest ethanol company, Ingredion, informed its suppliers the company has decided to cease production indefinitely at its Cedar Rapids plant. The Renewable Fuels Association (RFA) stated about two dozen out of 200 plants are idle as of early January. We cannot help but sit here and feel relieved for our commercial producers that such a demand market has prevailed despite slumping energy demand. Imagine if export sales slumped as well? Let’s just say we wouldn’t be above $5.
Luckily, we can redirect our demand issue and lean on China’s help. In 2017, Beijing had plans to mandate an ethanol blend, similar to the U.S. government’s 10% ethanol blend mandate. China focused on a 2020 target date but with domestic logistics, weather, the trade war, and COVID, progress is slow. While internal progress to build plants has slowed, their economy is in full recovery with energy demand on the rise, including ethanol. ADM revealed in its most recent earnings call that China has been buying ethanol in large volumes from the U.S. This will take time to be reflected in government-issued reports, but this may allow the ethanol industry to participate in this demand market.
It is worth noting that as of late last week, U.S. ethanol production margins had rebounded some. As of January 28, ethanol production is still slumping, down 9.3% from last year. Looks as though we have China to thank in more ways than one.
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