Though it was a rough start to the week pricewise, we saw corn, soybeans and wheat all recover midweek to finish strong across the board. After the close we saw evidence funds were strong sellers the week prior, especially in corn, with the managed money selloff this past week in the top 3 of historical selloffs.
Seeing managed money in corn sitting on their largest net short position since August of 2020 as we head into the growing season is seen as exceptionally bullish by many. After all, May should be when we see some of the higher levels of risk premium factored into the market, as we have no idea what is going to happen when it comes to production or demand in the new crop season.
Corn is not the only place we’re seeing money flow head for the exits, wheat speculators moved to their largest short position in over 5 years this week, something that feels shocking considering what we were facing just a year ago. The managed money soybean long is now the smallest since December 2021 as well.
Many traders contend this will be short lived, arguing that speculative money will work its way back into commodities. However, as I discussed in my Sunday Scaries article from March 12th, this may not necessarily be the case going forward, as there are plenty of other places now to park money that feel far less risky than grains.
I argue we are at a point of transition in many facets of the markets. Not only do we have the Fed working hard to cool inflation, making some of the largest rate adjustments in recent memory, we have the atmosphere transitioning from La Nina to El Nino, the world becoming accustomed to Ukraine and Russia at war, and a potential major shift in US agriculture when it comes to our ability to compete for export business in the years ahead.
But before we get ahead of ourselves trying to predict the future, I think it is valuable to look at each commodity, their current demand structures and evaluate what we could see from the USDA Friday in their first official new crop outlook.
Wheat is the market that seems to have caught the most folks off guard. Chicago wheat ended 2022 trading just above $8.00 on the July contract, managing to bottom out it appears (and I hope for the sake of my growers) just below $6.00 earlier this week. With only 26% of the US winter wheat crop rated good to excellent and world demand seemingly strong, the epic fall we have witnessed in this contract has hurt many.
However, the world cash market does not appear concerned when it comes to overall supply availability, with Egypt’s state wheat buyer getting 38 offers in their latest tender. The future of the Black Sea Grain Corridor appears bleak at this point, with Russia holding a hard line on their demands and the UN struggling to get both parties to sit down together without punches being thrown. There has been some talk though that the UN, Turkey and Ukraine may decide to continue moving grain through the corridor with or without Russia’s blessing. This would be an interesting turn of events but would not be unprecedented as we saw a similar move when Russia announced the closure of the corridor back in November.
From an overall supply and demand standpoint, the US balance sheet feels difficult to reconcile, as historical losses in production are expected to be seen throughout much of the Hard Red Wheat Belt. With the Soft Red Wheat Belt seeing solid production conditions and a sharp uptick in planting, it is possible we could see a historical variance in market structures and price outlooks, driven almost exclusively by basis and spreads in the domestic market. Spring wheat remains a wildcard with farmers working overtime to get that crop seeded in the north ahead of the heavy rainfall forecast to fall this week.
When putting together an ending stocks outlook for new crop it is easy to see how the overall wheat carryout could remain nearly unchanged year over year, if not fall off slightly from the USDA’s most recent old crop projection of 598 million bushels. We can be aggressive on production cuts, but with the world able to access ample supplies of cheaper wheat out of Russia, Australia and Romania, much of the projected loss in production will keep domestic prices likely elevated enough to curb exports.
Soybeans may not realize it yet, but they are the poster child when it comes to a transforming market. We face an unprecedented situation when it comes to Brazilian production and what that means for US market share around the globe. This has been something traders have discussed for a handful of years now, only to see the projected date of death for the US soybean export market pushed back after La Nina reduced Brazilian crop size the previous two years.
There is talk overall production figures for the crop recently harvested could grow another 3 mmt (110 mbu) or more as better than expected yields in Southern states have been seen to wrap up the year. While basis values offered out of Brazil have increased significantly from peak harvest lows, they remain well below current US offers.
According to Agrinvest, a Brazilian brokerage and analytical firm, though there has been improvement from lows seen two weeks ago, Brazil remains around 30 cents per bushel cheaper than US offers for harvest shipment, with that spread remaining well over a dollar for the remainder of the US crop year. The difference in price is making it difficult to see how the US meets old crop export projections with 152 million bushels left to sell and 134 million bushels of soybeans left to ship before the end of August. With new crop sales running 9.3 mmt (342 million bushels) behind last year’s pace, there are thoughts the USDA could cut the outlook for both crop years, resulting in growing ending stocks after years of nothing but shrinking supplies.
Of course, we are on track to add over 400 million bushels of domestic crush demand over the next couple years, helping to soften the blow, though many would argue that it will not be enough to keep ending stocks from growing—without a production issue in either hemisphere.
Corn ending stocks for the new crop year have been heartily discussed, with many still working to wrap their mind around what carryout moving to over 2 billion bushels could mean for price, while others contend there is no way ending stocks will grow that much year over year.
When looking at the corn outlook, it is very similar to beans in that the Brazilian cash market there should give pause to anyone optimistic on the export outlook. Basis values have stabilized recently across Brazil as farmer selling has slowed to a trickle, with gut slot harvest for Safrinha corn still weeks away. Even with stabilized values Brazilian corn is running around 70 cents cheaper than US offers into the world market for June.
With 349 million bushels of corn left to be sold and over 500 million left to ship to meet USDA projections for old crop, the corn export outlook is like what we are seeing in beans—the only difference being the Brazilian corn crop has yet to hit the bins, leaving some room yet possible for error.
In reality though, we will likely see the USDA further trim the old crop export outlook for corn in Friday’s report, possibly cutting into new crop demand as well, as their Ag Outlook Forum figure from February called for an over 400 million bushel year over year increase in exports.
In the end, when all is said and done, Friday’s report is very likely to show stable or growing ending stock projections both domestically and globally for both corn and soybeans, with global supplies for wheat likely to remain stable if not grow slightly. What that means for speculators who are beginning to weigh their investment options and we find ourselves facing what could potentially be an incredibly rough summer from an economic standpoint remains to be seen, but farmer length alone around the world means rallies will likely be capped without a major weather issue.
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.
