I began a January 8, 2023, Barchart article with a quote from my Q3 report that remains significant as the markets that feed and increasingly power the world moves into the 2023 crop year in the Northern Hemisphere.
The path of least resistance for the agricultural products that feed and increasingly power the world remains cloudy as we head into Q4 (and Q2 2023). The war in Ukraine is the most significant factor for the sector, as supplies from Europe’s breadbasket remain questionable. Moreover, since Russia is a world-leading fertilizer producer and exporter, farmers worldwide have experienced soaring prices and declining supplies of fertilizers required to sustain crop production.
The war is bullish for grain and oilseed markets, but an end to the conflict could cause a sudden and brutal price correction for many of the sector members. Meanwhile, each quarter the worldwide population grows by around twenty million people and is approaching the eight billion level. Each year the world requires more gains and oilseeds to feed and fuel a growing number of people. Farmers worldwide need to produce more crops to satisfy requirements as the demand side of the grain balance sheet is ever-growing.
The grain sector edged 0.66% lower in Q4 and 1.72% higher in 2022, but many sector members rose to multi-year, with some trading at record highs during last year. In Q1 2023, the grain sector posted a 4.10% decline.
Soybeans edge lower in Q1- Soybean meal and oil post more significant declines
Nearby CBOT soybean futures rose 14.34% in 2022. In Q1 2023, the oilseed futures fell 0.91%.
The chart highlights the decline in March that led to the Q1 loss. Nearby May soybean futures settled at$15.055 on March 31, 2023, and were above $15 on April 13.
Processors crush soybeans into meal and oil, and Q1 losses in the two products weighed on the raw oilseed futures. After rising 16.23% in 2022, soybean meal futures fell 2.61% in Q1, closing at $466.00 per ton on March 31, 2023. Soybean oil rose 13.34% in 2022 and dropped 13.04% in Q1, settling at 55.49 cents per pound at the end of the first quarter. May meal and oil futures were slightly lower on April 13. Falling soybean product prices are bearish for soybean futures.
Corn prices fell over the three-month period
Nearby CBOT corn futures rose 14.37% in 2022. In Q1 2023, the coarse grain futures fell 2.65%.
The chart illustrates the bearish price action from late February through late March that took the May futures to a $6.0675 per bushel low on March 10. Corn futures recovered and settled at $6.6050 on March 31 but were slightly lower on April 13.
The U.S. ethanol mandate requires gasoline refiners to use an ethanol blend. Since the U.S. is the world’s leading corn producer and exporter, coarse grain is the primary ingredient in biofuel. Ethanol prices rose 3.65% in Q1 after a 2.64% gain in 2022, and strength in biofuel prices provided some support for corn futures.
CBOT Wheat posted a double-digit percentage decline, but the KCBT-CBOT wheat spread soared
In March 2022, nearby CBOT wheat futures rose to a record $14.2525 per bushel high as Ukraine and Russia are leading wheat-producing countries. In 2022, the CBOT soft red winter wheat futures posted a 2.75% gain as the price fell steadily from the March peak.
The chart highlights the decline in CBOT wheat futures to the $6.9225 per bushel settlement price on March 31, 2023, a 12.59% loss in Q1. Wheat futures halved from the March 2022 high to the March 2023 closing price, and was lower at the $6.70 level on April 13.
Meanwhile, the KCBT hard red winter wheat versus the CBOT soft red winter wheat futures spread in May settled at a $1.8550 per bushel premium for the KCBT wheat on March 31, 2023, up 89.5 cents from the 2022 closing level. Since many U.S. bread manufacturers price requirements using a KCBT pricing formula, the rise in the spread reflects significant supply and price concerns, leading wholesale consumers to hedging risk. The long-term average of the hard versus soft red winter wheat futures is a 20-30 cents per bushel premium for the KCBT wheat. The $1.8550 level on March 31, 2023, is a bullish sign for the wheat market.
Oats and rice futures moved lower
The oat futures market dropped 46.23% in 2022, and the selling continued in Q1 2023 with a marginal 0.82% decline. Nearby oat futures settled at $3.6425 per bushel on March 31, 2023, and were lower on April 13 at just over the $3.35 per bushel level.
Rough rice futures posted a 23.38% gain in 2022 and moved 3.52% lower in Q1, settling at 17.415 per cwt. Nearby rough rice futures were higher at the 17.665/cwt level on April 13.
Q2 is the start of the 2023 crop year as the war in Ukraine continues to rage
The second quarter of 2023 is a critical time for the grain futures market as it marks the start of the planting season in the northern hemisphere. The weather is the most significant factor for the path of least resistance of prices, but the war in Europe’s breadbasket continues to underpin prices. Other producing countries must compensate for the loss of agricultural production in Ukraine and Russia.
Meanwhile, input prices have soared as inflation has caused energy, labor, fertilizer, financing, equipment, and other farming expenses to rise. Farmers will need to see prices remain at elevated levels to compensate for increased production costs. Moreover, the demand side of the fundamental equations continues to increase with the global population, putting additional upside pressure on prices. Tight balance sheets could cause grain and oilseed prices to soar if crop production does not satisfy worldwide requirements.
Another factor putting pressure on prices is the increased use of corn and beans for biofuel production. Higher oil and oil product prices are increasingly bullish for the coarse grain and oilseed markets as the world addresses climate change with alternative and renewable fuel sources.
I remain bullish on the grain sector going into Q2 and believe any significant selloffs will be buying opportunities.
On the date of publication, Andrew Hecht 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.
