I’m a worrier by nature. Have you ever met a kid that came out of the womb worrying? That was me. It works great to be a worrier in risk management to a certain extent, as I can see several different ways a situation could evolve and lay out broad plans for each.
Most times these plans aren’t needed as the situations never seem to evolve to the extremes many expect or that my brain has created, but other times, being prepared for the unexpected has suited me extremely well.
I preface with this because I realize it is easy for me to come across as the perpetual bear, the Debbie Downer no one wants to invite to the party. That isn’t me, as I can outline all of the ways my brain has put together situations where prices remain elevated for an extended duration.
After all, with oil putting together one of its best strings of performance since last June, worries over what is happening in the Black Sea back on the rise, and a growing season and a half ahead of us, it is still far too early to assume anything.
With all of this said, I figure what better time than now to take a look beyond just this week, and tell you the big picture items I am watching in grains.
The first and perhaps the biggest, is what happens with China. I feel this cannot possibly be overstated as China accounts for most of our corn and soybean exports. Their demand has underpinned grain prices, and any disruption of such would be huge. There are so many interesting things happening in China it’s hard to even know where to start, but it does appear as though their economy is recovering and recent moves by the government to aid the ailing property sector have worked.
However, there are conflicting signs over what happens next with Chinese demand. Cash prices for commodities across much of the country have fallen as demand continues to show signs of weakening and margins continue to be pressed in livestock as well as in feed and processing. Hog producers continue to struggle, while crush margins have gotten so bad, the country’s soybean crush is estimated to be running around 40% of capacity and has ran at less than 50% capacity for several months in a row now.
One would think the reduction in crush capacity would push values paid for crush byproducts to new highs, but that hasn’t been the case as meal basis in the country has fallen over 35% since last November. Of course, ease of movement provided by a rollback in Covid restrictions could account for some of the recent basis weakness seen, as logistical snarls have nearly disappeared entirely. However, demand for supplies offered at government auctions has fallen off considerably as of late as well, with last week’s wheat auction seeing 77% of volumes offered purchased, with 15% of the rice offered bought.
However, recent purchases of US grain has been seen as a bullish factor, with questions of how deep their corn demand is running through the mind of every farmer and trader, bullish or bearish alike. It is interesting to note we’ve seen a recent uptick in local officials being arrested for corruption regarding grain stocks, with reports of many reporting stocks on hand that actually didn’t exist. With much of the crackdown on corruption starting in 2018, with a full blown in-depth investigation started in 2020 and many just now being named as perpetrators, it makes one wonder if the huge uptick in corn demand over the recent years has been to replenish the stocks they thought they had prior to government investigations. This would explain the push for more expensive US supplies as US grain quality is known for being some of the best in the world and is suitable for long duration storage.
All of this in addition to China’s geopolitical moves and investments in commodity rich foreign countries will have my attention throughout the year ahead. According to reports released late last week, China’s major trading arm COFCO has invested over $2.3 billion in Brazilian agriculture since 2014. In addition to money invested, Brazil’s ag minister made it known the country is courting COFCO to help invest in the estimated 74 million acres of pastureland available to be converted to agricultural production.
Brazil’s growth in agricultural production is unparalleled to any other country thus far, and will likely remain as such in the foreseeable future thanks to major Chinese investment.
In addition to China, I am watching what is happening when it comes to the movement of Ukrainian grain in the months ahead. Russia has timed what I will call this most recent power move regarding the grain corridor nearly perfectly, as it is coinciding with many neighboring European countries limiting the flow of Ukrainian grain and going against the good will and solidarity that had marked the first year of the war.
Farmers in Romania, Poland, Slovakia, Hungary and Bulgaria have all been complaining about the drop in their cash grain prices due to the influx of cheap Ukrainian grain over the last year. As such, Hungary, Poland and Romania have all announced ways they intend to limit the flow of Ukrainian grain into their country, saying they will still work to ship the bushels from port, but that they will not allow the purchase of Ukrainian grain by domestic buyers. Farmers in the countries mentioned say bins are full as they head into a fresh growing season, with many still holding on to unpriced bushels as the market price remains depressed.
As for Russia, they appear to be serious this time, outlining 5 specific demands they say need to be addressed prior to an extension of the corridor beyond their chosen deadline of May 18th. A return of their major agricultural bank to the SWIFT payment system is the cornerstone of their requirements, with a resumption of machinery and machinery parts trade, the unfreezing of funds of those tied to agricultural and fertilizer exports, the resumption of flow through an ammonia pipeline through Ukraine to Ukrainian ports and a lifting of restrictions on insurance and reinsurance are all required to continue the flow of grain through the corridor.
For its part the UN says it is trying to facilitate the negotiations, but does not have the power to guarantee any of these things on its own. Whether the West will relent is a big question, and could have major implications on grain flow in the weeks and months ahead.
While those are the big two, what happens in the outside economy will be key as well. Fed economists now believe we see at least a soft recession in the last half of the year, with what that means for commodities and commodity demand remaining cloudy at best with conflicting outlooks. Some feel commodities become a safe haven in times of global economic turmoil, while others feel global economic uncertainty will strengthen the dollar and pressure demand.
Global cash values and what they indicate when it comes to actual supply and demand will be huge as well. So many times in grains we get caught up in what a spreadsheet says, choosing to ignore cash market signs. One of the best examples of that being the recent move in the wheat market. So many were focused on just how tight the supply and demand spreadsheet said the market was they completely ignored falling cash values, increased supply availability and falling demand until the market had chopped off nearly 30% of price, then wondered what happened.
With flat prices in Brazil falling to multiyear lows for both corn and soybeans and worries over demand depth, what happens in the global cash market in the months ahead will have major implications when it comes to new crop demand.
This all without discussing weather, domestic demand signals and a whole host of other things that could influence this market ranging from ethanol blends to a Taiwanese invasion, we can pretty much guarantee this year’s market moves will likely be some we remember for a long time to come, what that means for direction however is anyone’s guess…
As always, don’t hesitate to reach out with any questions. Have a great week and stay safe!
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