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Dent to crop sowings from low prices could 'ignite' buying wave

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Corn and soy prices have fallen low enough to halt sowings expansion, potentially laying the ground for buying pressure ahead, Bunge said, in comments which also termed a "big thing" US plans to slap a duty on biodiesel imports.

Soren Schroder, the chief executive of the crop trading giant, said that crop prices had dropped to levels which had "stopped the expansion in South America" in agriculture which has fuelled huge increases in world crop production.

Brazilian area of corn and soybeans, for instance, has soared 47% over the past decade on a harvested basis, according to US Department of Agriculture data.

"At current prices, we don't anticipate any additional acreage to come into production over the next year. And in the US maybe for the next cycle, we will have a reduction in acreage as well

Further price falls ahead?

This may not mean the end of pressure on values, which Mr Schroder said had actually proved surprisingly firm, given the extent of world inventories.

"For some reason, markets have been very, very resilient and not reflected the build-up of stocks that is now three years into the making and with another one coming.

Indeed, he added that "I do expect that with another record crop in the US in the making that global market prices will reflect this".

'Almost silly'

However, further decline in prices would take them "down to levels where it is almost silly not to extend coverage", among buyers which have largely stood back from the market, given ample supplies.

The potential halt to acreage expansion, "combined with any kind of weather issue, whether it's in the US or in Europe or South America, I think would quickly ignite a round of forward buying like we haven't seen frankly for years", Mr Schroder told investors.

"Price will ultimately make it attractive for end users to extend coverage."

'Trapped'

The comments followed the release by Bunge of weaker-than-expected results for the January-to-March period thanks to the knock-on effects of slow farmer selling which also cut earnings at rival Archer Daniels Midland.

Bunge was "trapped" in situation where soy processing margins in South America were feeling pressure both from slow selling by farmers, awaiting higher prices, while buyers were reluctant to purchase crush products ahead, given the record harvests in train.

"Farmers don't like prices and end users have no reason to extend full coverage because they see there's even more coming down the pipe," Mr Schroder said.

As of the end of March, Argentine farmers, for instance, had only priced some 7-8% of their 2016-17 soybean harvest, although that figure is expected to rise "to 50% or 60%" by the end of June, a factor which will weigh on values and support crushing margins.

'Big thing'

However, the improvement in Argentine crush values could be derailed if the US implements ideas to place an anti-dumping duty on biodiesel imports from the South American country, as well as from Indonesia – big exporters of the biofuel to the US.

Indeed, such a move would be a "big thing", Mr Schroder said, saying that it would mean that the US would have to meet solely from domestic supplies mandated demand for biodiesel, which is made from vegetable oils such as soyoil.

Turning self-sufficient in biodiesel "will be difficult. Given the installed capacity in the US, I don't think we have enough," he said.

'Sizeable net positive'

Still, such a move "will create an enormous demand for vegetable oil, both of soybean oil and canola oil, which will be very positive to crushing margins in both Canada and the US.

"So that part would be a big boost to North American crushing margins, both in softseeds and in soy crush."

Mr Scbroder is that the "the flip side, of course, is that biodiesel margins, which have been good in Argentina, won't be there and the industry won't run".

However, for Bunge, the overall impact "over a period of, let's say, 6 to 9 months would be a fairly sizeable net positive.

"You're talking about maybe a $20 million reduction in income in Argentina from biodiesel compared to the entire fleet of crushing capacity in the US and Canada getting a boost in margins."

By Mike Verdin

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