- Russia invaded its neighbor and sovereign country Ukraine nearly 18 months ago.
- Since then, US exports of wheat and corn have continued to struggle as the world supply and demand deck was reshuffled.
- While algorithms got involved overnight, the markets are telling us to not overreact to any headlines coming out of Russia.
There’s nothing like getting the work week started off with a bang. The first news I saw Monday morning was a MarketWatch piece with the teaser, “Russia says it’s withdrawing from the Black Sea grain deal”. This wasn’t completely unexpected, as the past couple weeks has heard a growing chorus of voices all singing the same tune, except – of course – yours truly. The melody continues to make Russia killing the deal the ‘why’ to the ‘what’[i] of last week’s explosive rally in corn and Chicago wheat heading into the weekend. I don’t like to play the ”whys guy” game, but a look at some of the other factors moving the market provides us with other possibilities as well.
Let’s start with the cold, hard fact of US export demand. Remember, Russia invaded its neighbor and sovereign country Ukraine back in February 2022, meaning exports from the Breadbasket of Europe have been disrupted for roughly a year and a half. Ukraine is largely known for its wheat exports, historically making up nearly 10% of global exports.[ii] In contrast, according to USDA, the US accounted for about 13% at the end of 2020-2021 before dropping to 11% during 2021-2022. The latest estimate for 2022-2023 has the US covering only 9% of global exports, so the trend is not in the direction of indicating the world is pounding on the United States’ door for supplies. The latest weekly sales and shipment update showed the US had only 131 mb of unshipped sales on the books for the 2023-2024 marketing year, as compared to 197 mb the same week last marketing year.
What is the Chicago (SRW) futures market (ZWU23) telling us? First and foremost, the forward curve is showing a carry, unlike nearly every other market in the grain and oilseed sector. A closer look shows us the September-December futures spread closed last Friday covering 72% calculated full commercial carry[iii](cfcc) with 67% or more considered bearish. It should be noted the July 2023 contract went off the board with the July-September spread covering 112% cfcc. If we look at the 2023-2024 July-to-May24 forward curve at the end of June (just as July went into delivery), it covered 65% cfcc. The bottom line is the commercial side of the market, those who are actually involved in the movement of cash grain around the world and therefore have a good handle on what’s going on in the Black Sea region, have been and remain bearish the US SRW wheat market.
As for corn, at the end of January 2022 the pace of US shipments projected total 2021-2022 marketing year export demand to decrease 3% from the previous marketing year. By the time we reached the end of August, the end of the 2021-2022 marketing year, that deficit had reached 11%. The latest weekly sales and shipments report, for the week ending Thursday, July 6 (2023), showed the 2022-2023 shipment pace projecting total exports 32% less than what was reported during 2021-2022, which again was 11% behind 2020-2021. Furthermore, the US only had 160 mb of unshipped 2022-2023 sales on the books as compared to the previous year’s 276 mb for the same week. However, a look out at 2023-2024 shows 159 mb already on the books.
But what about the market? What is it telling us? At the end of June the September-July24 forward curve covered a bullish 26% cfcc, a bit stronger than the end of May’s reading of 19% cfcc. We know US supplies are tighter than what is being officially reported at this time, though USDA did creatively drop its 2022-2023 ending stocks estimate by 50 mb in its latest round of supply and demand guesses.
It should also be noted both the September and December corn (ZCZ23) contracts completed bullish key reversal patterns on their respective weekly charts last week, with Dec23 in position to complete a bullish reversal on its continuous monthly chart at the end of July. If so, this would end the long-term downtrend that began at the end of May 2022. What does this mean? The first premise of technical analysis is “Market action discounts everything”, or in other words, we can see the what without knowing the why. In the case of corn, the market seems to be telling us it is about to get more bullish. It could be due to Russia, despite what actual evidence suggests, or any number of other reasons.
In the end, one doesn’t have to be a child of the Cold War to immediately doubt anything and everything to come out of the Kremlin. I have long argued anything of value held by Ukraine at Black Sea ports has been stolen by Russia and shipped off as its own. The question now is if the world can actually be so naïve as to have believed the situation was going to change in Ukraine’s favor, with all those metric tons of grain suddenly becoming available again. Maybe some in the industry, yes, but not the majority of those who know better.
[i] Recall Newsom’s Market Rule #5: It’s the ‘what’, not the ‘why’.
[ii] According to USDA, Russia historically accounted for roughly 16% of global exports, meaning the Black Sea region in general covered 25% of world wheat exports.
[iii] Calculated full commercial carry is the total cost, storage and interest, of holding cash bushels in commercial storage. The higher the percent the more bearish the real fundamentals of a market.
On the date of publication, Darin Newsom 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.
