This week should be a fun one in grains with no shortage of news available to move the market and potentially break us out of our recent range.
The USDA will update their supply and demand outlook on Tuesday, with much of the trader focus placed on supply. Tuesday’s update will incorporate objective yield data, giving us more ‘boots on the ground’ insight than what we had with the August yield estimate.
The less than stellar finish for the crop has prompted talk of major yield cuts. Though the question remains when it comes to what kind of yield potential we had mid-August and where we are cutting from. In addition to potential yield adjustments, data released by the USDA arm responsible for farm programs and where farmers certify their planted acreage every year pointed to a potential increase in both corn and soybean plantings.
Some analysts believe the acreage figures point to a potential increase of around 700,000 in corn and around 200,000 in soybeans. However, it is not a guarantee that the uptick in planted acreage will directly carry over into harvested area, though anecdotal reports indicate abandonment will be lower this year than last.
We could see some slight adjustments to old crop carryout that would carryover into new crop beginning stocks, but they are expected to be minor at best.
Tuesday’s yield and acreage estimates are where the risk for surprise lies, likely keeping traders from getting aggressive ahead of its release. Going into the report, the range in corn yield estimates is 171.5 to 175 bushels per acre, while in soybeans it is 49.6 to 51 bushels per acre. Factoring in thoughts on acreage with average yield shows traders expect a cut to overall corn production of 103 million bushels, while soybean production is expected to come in 48 million bushels lower on average.
September and October tend to be the more important yield updates, setting the stage for final production figures that will be reconciled with stocks figures released the second week of January. It gives me great joy to see the production season start to wrap up and to have the discussion transition from hypotheticals to reality, with market structure telling us the true story of supply and demand.
When it comes to discussing demand, I realize I run the risk of beating a dead horse, as the overall situation there feels somewhat unchanging. Chinese demand remains the wildcard, with the government doing all that they can to support the economy while managing what experts call troublesome levels of local debt.
Chinese bean imports have been the story the last several months, with overall imports now on track to exceed the recent USDA projection by over 100 million bushels. Chinese crush margins have been incredibly strong recently and continue to run strong into the end of the year.
Of course, record low Brazilian basis levels and relatively stable ocean freight values have helped support crush margins but a burst in soybean meal demand led by a build in hog herds mid-summer really helped to aid that strength.
Dalian meal values have been on a tear since May, with this week’s lower trade only the second seen since then and the first lower close since July.
Chinese corn demand is where the biggest question mark lies for the US price outlook in the months ahead in my opinion. There have been obvious weather anomalies in pockets across the country, with recent basis strength and reports of port stocks in northern regions near a 10 year low giving me pause. Chinese import margins are strong as well, possibly pointing to a more aggressive import figure than the current USDA projection of 23 million metric tons.
However, with the Brazilian corn crop nearly 2 billion bushels larger than we saw in the 2020-2021 crop year, supply availability is much different.
Still, I will closely continue to watch ocean freight levels and export basis values for signs of demand increases as they will be seen there first, with rumors of trades heard far before USDA confirmation.
With demand being the driver, I would be remiss not to mention interest rates and their continued influence on the market. Many end users around the world have returned to a more hand to mouth approach to physical supplies with the cost of carrying inventory continuing to increase and no sign of relief coming anytime soon.
The increased costs are not only reducing government driven demand--as seen in the case of Egypt’s government buying arm taking small percentages of bushels offered at half the cost of a year ago--but they are also reducing the aggressive buying nature of private end users both domestically and abroad.
I am continuing to watch the situation in the Black Sea. It has been interesting to see the wheat market ignore the increase in attacks from Russia on Ukrainian port infrastructure, showing we have seemingly reached peak headline fatigue there. Supplies remain plentiful out of the region, with Russia reportedly trading wheat at cheaper levels than what they are offering in public, to incentivize more direct government to government negotiation.
As long as Russia is working to ship nearly 1 million metric tons of wheat into the world pipeline a week, it is going to be hard to see anyone worry we are running short on supplies. However, with harvest wrapping up in the Northern Hemisphere and fall harvest just around the corner or having started, much of the easy flow of wheat tends to dry up. Once wheat is put away this time of year it usually stays put away until at least December, generally helping to stabilize prices this time of year.
In addition, with prices falling off as they have and the big increase seen in wheat acres a year ago, planted acreage this fall is likely to drop off in the US. A drop in production in Canada due to drought, as well as likely cuts in Southern Hemisphere production with problems in both Australia and Argentina as well as reported quality issues in Brazil, could make wheat a buy here in the short-term.
Overall, the story seems to remain the same. We look to Tuesday to get past the risk of a supply surprise, then turn our attention back to demand.
Other things I am watching this week:
--Logistics remain incredibly important, with river levels looking to remain problematic. Last year we saw freight levels soar on the back of big demand and a need to perform, so far this year changes in value have been relatively muted, all things considered. Is this another sign of poor demand, or is it a result of better positioned cash traders ahead of harvest?
--South American weather. Mato Grosso looks to remain dry into the start of their planting season this week. While it is early yet to be concerned, a return of rain to the region needs to be seen in extended forecasts soon or talk of a delay to bean planting could result.
--Argentina production updates. It is amazing to think the world’s largest soymeal exporter and 3rd largest corn exporter experienced an historical drought and we are still talking about poor corn exports and seeing South American crush margins trade at incredibly negative levels. Forecasters believe El Nino could help push Argentina production back to near record highs, what does that mean for the global outlook?
--Macro sentiment. It appears the idea we are going to avoid a recession and that everything will be okay has become a generalized sentiment here over the last several weeks. However, there are signs we may not yet be out of the woods, what does higher for longer really mean when we start to see rates hit commercial real estate and other vulnerable sectors of the economy?
As always, don’t hesitate to reach out with any questions. Have a great week!
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
