It’s been a very busy winter, between traveling to give market outlooks at the several farmer meetings I had the pleasure of attending across the state, to working to put together marketing plans for my customers and solving all the daily problems that come with moving cash grain, it’s been hard to sit down and put my thoughts into writing.
As we head into what is my 20th growing season, I feel a lot of unease looking at what is happening now and when it comes to making an educated guess of what is going to happen in the future.
There are so many different moving pieces in the market to pay attention to right now. We have the fund short that everyone loves to talk about. A short position of this depth is unusual this time of year for corn and soybeans, giving me a little confidence that they are unlikely to push their position too much shorter ahead of the growing season.
The Northern Hemisphere growing season is a complete unknown as well, with about the only thing remotely certain being that the transition from El Nino to La Nina is unlikely to happen without some type of volatility from Mother Nature. The dry conditions in the heart of the Western Corn Belt have been entrenched for four years now and are expected to see little in the way of improvement looking out into June.
While extended weather models should always be taken with a grain of salt, signals of possible heat and dryness working across the center of the country this summer give me pause when it comes to assuming anything from a production standpoint.
With all there is to pay attention to, let’s go ahead and break down the main developments I am watching as we head into the week.
Russia and Ukraine
I have been asked countless times over the last year or so what had happened to the war influencing grain prices. At the start of the conflict, traders breathlessly watched every headline, with prices pushed higher by any sort of hint grain movement or production would be disrupted. Recently, even reports of infrastructure in Odesa being hit would do nothing to impact price.
The difference of course being containment. From the start of the conflict world leaders, already concerned with inflation, did everything they could to get both parties to agree to leave energy and agricultural production untouched, as well as working to keep exports of the two sectors moving. For the most part the conflict has been simmering in the Eastern parts of Ukraine, with limited progress for either party, allowing much of the rest of the region it seemed to go on about their new way of life.
The situation there has escalated in a big way recently though, with Ukraine attacking Russian refineries on Russian soil. Ukraine has hit more than 10 major refineries and oil depots in Russia over the last couple of months, with a string of attacks last week that hit multiple targets, causing significant damage.
The US has reportedly asked Ukraine to stop the attacks, saying they are causing oil prices to spike and could result in Russian retaliation. Ukraine responded in kind, saying that while they understand the concern of US officials, the refineries and depots are legitimate military targets.
In addition to the increase in instances of Ukraine taking the war to Russia, the terrorist attack in Moscow on Friday could result in further escalation. Over 130 lives were lost with countless others injured after several armed gunmen opened fire in a concert hall. According to officials, ISIS has declared responsibility, with both Ukraine and the United States adamant Ukraine had nothing to do with the attack. Russian President Putin says the men responsible for the attack were trying to escape to Ukraine, adding that the US should turn over any knowledge of the attack as quickly as possible.
Whether it was tied to the Moscow attack or not, Russia ramped up their bombardment of Ukrainian infrastructure over the weekend, hitting several targets in Western Ukraine, as well as Kyiv. For its part, Ukraine says they hit two of Russia’s large landing ships that had been stationed in Crimea, causing significant damage to both.
In the end, with the slowdown in war funding from not only the US but other countries around the world, Ukraine will likely have to get a little more aggressive and possibly more creative in their attacks. For much of the war, Western leaders have had a say in what targets Ukraine could attack or the next steps they should take, keeping the war from simmering over and affecting the region. With that control seemingly starting to fade, the perception in the markets that the war is contained will likely start to fade as well.
China
I wish I could tell you succinctly what it is that is happening in China that has my attention, but I can’t. There are far too many mixed signals and far too many hands in the pot for anyone to say what is going to happen next there with confidence. There were a couple of different developments that had us ending last week on a sour note. First, there is talk that the Chinese government is looking to start subsidizing the usage of domestic beans in their crush industry. Chinese beans tend to yield less when crushed and are of lower quality than the imported supplies crushers prefer, leading to the lofty soybean imports we see each year. With the Chinese government subsidizing soybean planting in a big way the last few years, the supply of domestically produced soybeans continues to grow, leading officials to try and figure out a way to get local end users tapping into the local supply. At this point the details of any type of plan remain murky at best but could take the top-end off import estimates if something is worked out requiring a certain percentage of crush use domestic beans.
The Chinese government is also continuing to weed out corruption in the country’s grain industry, announcing a partnership between the State Administration of Market Regulation and the State Administration of Grain and Reserves. The partnership is said to aid data collection and inventory tracking of government reserves, something that appears to be necessary after billions of bushels have disappeared over the years, with countless officials arrested for corruption.
The Chinese government has also signaled they are willing to deal with a weaker currency, while continuing to loosen their approach to monetary policy. This is nearly opposite of the US’ approach and limits the competitiveness of the US into their markets.
Acreage and Quarterly Stocks Report
I hate survey driven reports from the USDA, hate them. They leave the door open to major surprises, because we are relying on information coming from a survey with a relatively low return rate fueled by farmers, this year especially, who are disgruntled at best ahead of the growing season.
In the conversations I have had with growers across the country a couple different things have become clear, first, cost cutting measures are being deployed. Whether that is cutting back on fertilizer applications, buying the cheaper seed or whatever it may be, every grower I work with and talk to is looking at what can be pulled out of their production plan with limited waves. A desire to plant something different than just corn or soybeans is real in fringe states too. While yes, in Iowa, Illinois, Nebraska and other ‘heart of the Corn Belt’ states, corn remains king, here in Michigan, I’m seeing a sharp increase in dry beans or other premium crops, in the Northern Plains I am hearing of sharply higher forage or spring wheat acres, while in the south I’m hearing of folks looking to up cotton acres.
Of course, these changes are from growers already growing some amount of those crops already, as no one is going to spend the cash to grow something that requires a new round of equipment purchases in a year like this.
Keeping this in mind though, has me thinking we could see a smaller number of acres making up the corn/soybean pie than we would typically see. At the same time though, I wouldn’t be the least bit surprised with 94 million corn acres…so sleep this week may prove fleeting.
In the end, I can’t help but feel like the silly season is just beginning in these markets. If you’re a grower reading this, target orders are likely to be worth their weight in gold this year. If you’re any other type of participant, I hope you have a helmet.
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.
