I will likely say this at the start of every month for the rest of the year, but it’s hard to believe it is already March. While the old adage is “time flies when you’re having fun,” I would not say the quick pace of time passing these last couple of months had much of anything to do with fun when it came to the markets.
Since the start of the year, we have watched Chicago wheat lose 85 cents in the July, while December corn has fallen 42 cents and November beans have lost 98 cents. It is no longer a question of poor margins for many farmers across the country, it is now all about deciding whether or not to lock in a loss.
With the cash pipeline feeling more than adequately supplied around the world and the 2022 threat of running out of food seemingly abated, prices have reacted accordingly, trading to multiyear lows across a whole host of commodities.
Lots of folks have grown more bearish with the decline, pointing to growing carryouts, poor Chinese demand and cooling inflation as reasons we should see prices continue lower. And while yes, it is hard to disagree, as those are things that can and likely will keep pressure on these markets for the next several months and maybe even years, I can’t help but feel as though our next leg in these markets is higher, not lower, and today we’re going to talk about why.
Weather
I get it, trendline yields are what they are. It’s not just an average yield thrown out from the USDA to get folks all worked up, there’s a scientific process and a whole lot of math that goes into projecting a 181 bushel per acre national corn yield and a 52 bushel per acre bean yield when projections are put together by the USDA initially in February.
Of course, when it comes to obtaining those yields, math and scientific process mean very little if Mother Nature does not cooperate. Yes, we have spent billions in technology over the years to try and lessen the impact poor weather can have on yields, as evident by last year’s surprisingly decent production season even with one of the drier starts on record.
However, with a dying El Nino preparing to quickly transition to La Nina, I think one of the only things we can guarantee about this year’s growing season, is that weather will be anything but normal in the year ahead.
In our webinar with Empire Weather last week, meteorologist John Homenuk discussed the risks that lie ahead in that transition. Having spent the last three growing seasons dealing with La Nina, part of me is sad our reprieve from the weather phenomenon was as short lived as it was. La Nina is a queen of weather chaos it seems, causing a variety of issues around the world, and tending to bring with it heat and dryness in the Plains and the Western Corn Belt.
While I’m not going to guarantee we see a weather issue, the risk seems much more elevated with the current outlook than in a normal year. You can watch a recording of that webinar here.
China
This week marks an important week for China’s outlook in the year ahead, with the kickoff of the National People’s Congress on Tuesday. This event is important every year, but with all the economic issues at hand, it brings with it an even greater sense of importance this year.
While it appears we are starting to see the situation in China’s property sector stabilize after a whole host of measures to help support both developers and consumers have been unveiled, traders will be closely watching the gathering this week for any signs of direct to consumer stimulus.
In addition to any news about stimulus, we tend to hear about any new plans or policies that could affect agriculture as well. China’s deputy director of the National Development and Reform Commission said over the weekend that he has put together proposals related to the protection of grain and fertilizer security—whatever that means.
It is interesting to note that China seems to be working its way back into the corn market. Chinese traders have been buying Ukrainian corn as of late, with over 10 cargoes reportedly sold so far. Ukraine’s corn is being offered at a much lower level than that of its Brazilian or US counterparts, but with reported quality issues and logistical hurdles that range from loading in a warzone to floating through the Red Sea on its way to port, the discount should not be surprising.
Domestic corn prices in China have quietly worked their way to multi-month highs. With rumors Sinograin has been told to get some corn ownership for reserves, purchases from the US down nearly 3 mmt from a year ago, and our offers competitive, there is a real possibility we could catch some Chinese buying in the near-term if they truly are looking to fill up reserves ahead of the election.
On the soybean side, private crushers are looking at positive margins on bushels bought out of Brazil for the next few months, with basis levels for soybeans and meal starting to firm. While it may not translate directly to US business, any signs Chinese buyers are looking to advance coverage would be positive to price.
Slow Farmer Movement
After being forced to make some pretty ugly decisions this past week when it came to rolling or pricing contracts, in addition to facing some big March 1st cash flow deadlines, it appears the farmer cut loose over 180 million bushels of corn last week through Tuesday, according to the commitment of trader’s report released Friday.
With that experience fresh in their minds, the promise of fieldwork lying ahead and the markets as poor as they are, the farmer is likely to become completely disengaged from marketing over the next few weeks.
While slow farmer selling shortly after harvest can make for a tighter pipeline, bushels tend to still flow relatively easily at that time because of cash flow or quality needs. However, now that those bushels have been moved, it’s going to take more than a nickel here or there to get the farmer engaged. This is not only the case here in the US, but around the world.
Money Flow
While I want to make it clear, I am more of a macro tourist than anything, I am watching the situation in the outside markets closely, as it seems we could be close to seeing a shift in psychology there that could influence money flow.
Euphoria has set in with the S&P 500 notching over 14 record closes since the start of the year, with thoughts of soft landings, full employment and low rates dancing in our heads. While again, this is far from my area of focus, I have been doing this long enough to know that something will inevitably happen that shakes confidence, and prompts folks to find new or different places to invest their funds.
With grains near multiyear lows, funds sitting near record short and a whole growing season in front of us, could a return to buying be in the cards? With all the uncertainty in the world over just about everything, I would have to say it is possible.
In the end, while I remain long term price neutral to even slightly bearish *IF* things develop as currently projected, it seems we may be betting a bit on the come.
So, while how the year ahead plays out remains to be seen, to go into it with little in the way of risk premium built in seems a touch risky with all the unknowns at hand.
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.
