Welcome to Hot Commodities Edition 6: Soybean Woes and Energy Flows
Welcome to Hot Commodities. This bi-weekly newsletter uses the PanXchange team’s experience and knowledge in physical commodities to bring you perspectives on what’s happening in the elusive, opaque domestic and international markets. And, of course, we're going to keep you up to date on blockchain -- what's working, what's practical, and what's downright lunacy.
Farmers across the U.S. are feeling the heat as the USDA estimates September soybean ending stocks of 845mm bushels, up from 60mm in August, and a whopping 300mm bushels over September 2017. November futures are hovering around $8.50 per bushel, with cash prices across the U.S. equally as worrying. Delayed pricing service charges are up significantly year over year, and farmers without on-site storage anticipating better pricing in winter or spring will be at the whim of available storage space. Iowa, the second largest state agricultural economy in the U.S., will be hit particularly hard by the tariffs, with an Iowa State University analysis projecting Gross State Product (GSP) to lose $1 to $2 billion dollars due to the tariffs.
While U.S. prices including the 25% tariff have fallen enough to be competitive with what is still available from other origins, Chinese traders are hesitant to risk purchasing cargos and being ostracized by the government. The soybean tiff goes beyond just a tariff, and Chinese traders -- and particularly state-owned enterprises -- will exhaust every available alternative, even when U.S. origin soybeans are economical compared with other origins.
One alternative strategy discussed at an export conference by Mu Yan Kui, vice chairman of a trading subsidiary of Singapore-based Wilmar International, is to change hog feed rations from average 20% inclusion down to 12%. While commercial U.S. feed operations build different rations based on regional commodity access and least cost rations, U.S. average of soy inclusion for hogs likely averages around 20%, but that’s largely due to availability of soybeans. European feed operations, which import a large portion of the soybeans they consume, use a ration closer to 12%, with the balance made up of corn.
U.S. farmers aren’t ones to shy away from hardship, staying resilient through bumper crops and droughts, using risk management tools like futures and options contracts, and integrating data like weather and satellite imaging. But the real question on farmers’ minds is what will be the long-term damage. Chinese feed ingredient companies have been reluctant to switch to the lower soymeal rations, but this might accelerate the transition. China is already pouring billions into developing nations through the Belt and Road Initiative, and has the ins to easily transition into agriculture in places like Kenya and Uganda, with vast arable land but relatively low yields per acre. David MacLennan, CEO of Cargill, spoke of these long-term effects in a Bloomberg interview.
Markets are indeed dynamic. Winners and losers in a new market structure after the cool-down have yet to be chosen.
Frac Sand Update
Are there international export prospects for U.S. frac sand on the horizon? Here’s a snippet from our weekly frac sand update:
“With a recent uptick in Vaca Muerta activity, and the lifting of a temporary ban on U.S. origin frac sand, this may become a competitive source of demand for an over-supplied U.S. market.”
The Vaca Muerta shale play in western Argentina is hot on IOC’s minds, with EIA estimating 16.2 billion barrels of technically recoverable oil and 308 Tcf gas, the highest in South America (see chart below), but infrastructure and technical challenges have limited growth to essentially zero production. Will expertise and sand exports from the U.S. help spur a revolution in Argentina? The frac sand import market is heavily brokered and business practices in South America are often very risky, but the South American market could be a huge opportunity and outlet for the frac sand market, which is experiencing a supply glut from the sand mine boom.
CME Crude Futures
CME Group released new information on the WTI Houston light sweet crude futures. The contract, scheduled to launch in Q4, will be physically deliverable to three Enterprise Houston system locations, pending approval. Crude will be deliverable at Enterprise Crude Houston (ECHO) terminal, Enterprise Houston Ship Channel (EHSC), or Genoa Junction.
The press release says that the new contract “expands CME Group's already robust suite of crude oil futures and options and will complement the global benchmark NYMEX WTI Light Sweet Crude Oil futures,” but how much of that liquidity will be cannibalism from the WTI Cushing contract, and how much will be organic growth?
Companies have invested billions in physical storage and flow monitoring around the Cushing hub, with stiff competition in storage forecasts. But the hub has become less relevant and more of a stopping point for U.S. and Canadian crude flowing to the gulf complex for refining and export.
With volume on primary benchmark futures contracts regularly hitting all-time records, the total amount will certainly continue to grow, but the split between where the volume flows will be very interesting to watch.
More LNG Players
More new entrants to the U.S. Gulf trading as Cheniere Energy, owner and operator of the Sabine Pass LNG facility in the Gulf of Mexico, announced a long-term off-take contract with Vitol, the world’s largest oil trader, moving over 7 million barrels per day, and trading 7.4 million tons of LNG in 2017.
The 15-year contract is priced at Henry Hub plus service fees signals more interest from traders and merchant outfits to take risk on spot transactions as the LNG market structure continues to develop. The new CME physically delivered LNG futures will require as much liquidity as possible.
In tandem with this new partnership, a consortium of major players backing LNG Canada is set to announce a $31 billion investment in an LNG export terminal out of western Canada. We'll update you on progress in the next edition.
A consortium of banks and physical oil players announced a new blockchain venture for the physical oil markets. This particular use case is interesting, as the companies are aiming at two specific pain points in the trade finance industry: KYC documentation and digital letters of credit using the Ethereum blockchain.
As we’ve mentioned previously, focusing on one specific pain point in the supply chain will be key to success. Letters of credit (LOCs) require excessive amounts of physical paperwork, signed and overnight-ed between counterparties. Papers get delayed and lost, pieces go missing. Digitizing the document transfer in a secure and encrypted way offers significantly value for physical traders. We’re excited to see where this goes.