Putting my thoughts together in a cohesive manner may prove difficult this week with all that is taking place around the world, both in and out of the commodity sector. Once in a generation events seem to be happening every other week. This leaves us trying to figure out what it all means, with many, me included, doing their best to guess what happens next.
For me, the dynamics of the current geopolitical situation are fascinating. We are seeing interesting shifts take place among nations in both political alliances and trade. With the US now just a piece of the global pie when it comes to grain and oilseed production, the developments around the world matter when it comes to price.
We are obviously not short of fundamental developments this week, both of the traditional variety and of what I like to call ‘the new normal’ in fundamentals. Traditional fundamentals are those things we all learned about in Commodities 101, USDA updates, export sales progress, crush figures, etc. The new normal fundamentals, include wars, monetary policy, global logistics and all the other fun things we have discovered can influence the flow of goods around the world.
From a traditional fundamental standpoint, we did get an update from the USDA late last week that will set the tone for overall supply and demand fundamentals through the end of the year. As we work through October and bring in more of the crop, we will get a better idea on production, but for the most part it is unusual to see a major adjustment in USDA production outlooks from here.
The USDA lowered corn and soybean yields a bit more than what traders were anticipating. This kept soybean carryout unchanged from last month when traders were expecting a slight increase. Corn carryout came in lower than what traders were expecting as well, due to a cut in production expectations. From a yield standpoint, the USDA expects soybeans to come in the same as a year ago, with corn yield down just under a half a bushel per acre from last year.
With harvest taking place and the crop production season all but over in the Northern Hemisphere, attention turns to demand. The USDA remains incredibly optimistic when it comes to corn demand in the year ahead, something that is a little puzzling when compared to their wheat and soybean demand projections. All sectors of corn demand are expected to grow, up 571 million bushels from a year ago, with exports leading the growth.
Soybean and wheat demand outlooks show year over year reductions in export demand. Wheat for feed is expected to be up 31 million bushels from last year, while food usage is up 1 million. In soybeans, biofuel demand has crush up 88 million bushels from last year.
As it stands currently, based on the current projections from the USDA, domestic corn and wheat ending stocks are expected to come in much higher than a year ago, with soybean carryout nearly 50 million bushels lower.
Now for the fun part, at least in my opinion, the accuracy of the USDA’s current estimates almost entirely hinges on all the non-traditional factors we now have influencing the market.
When it comes to demand in the physical market, one of the comments that seems to be consistent across all continents is a relative lack of buying interest. Rising interest rates are behind some of this, as the cost of financing has slowed the accumulation of inventory. Just doing some rough, back of napkin style math puts the cost of holding physical bushels around 7 cents for corn, 9 cents for wheat and around 15 cents for beans per bushel per month figuring 8% interest.
Buying as much as you can as quickly as you can is costly. With cash offers from exporters around the world remaining relatively flat or growing even cheaper out into deferred months, supplies feel relatively plentiful, at least for now. This is allowing end users to continue covering needs in a much more hand to mouth fashion.
In addition to interest rates and the rising cost of money, the new round of geopolitical unrest is taking place in an area that is more of a demand sector for grains than a supplier. While the situation is potentially bullish for oil with all the moving pieces and potential major shifts in geopolitical relations between oil producers and the West, for grains, changes in true market dynamics should remain limited.
I am not going to pretend I am even remotely close to an expert in this arena, but my worry is Russia uses their presence in the region to somehow escalate the situation in the Black Sea and around the world. Having said that, it is interesting to note Putin has announced plans to travel to China this week, his first trip out of Russia since the Ukrainian invasion. When it comes to the current Middle Eastern conflict, China has asked both sides to use restraint, remaining relatively neutral after having spent many months trying to broker a peace deal between Israel and Palestine.
How China proceeds in the coming weeks geopolitically, economically, and when it comes to overall demand will likely prove to have the greatest influence on price direction. Their economy continues to struggle, with Country Garden now saying it may not be able to pay creditors, and the country’s government finding the stimulus plans presented so far are doing very little to improve consumer confidence. It is also interesting to note shifts that are happening in consumer demand, with poultry starting to displace pork as the preferred source of protein.
China’s government increased their corn production estimate in a big way this week as well, bumping up planted acreage and claiming better yields. Some question the validity of this report, pointing to weather conditions that were on par with 2020, the year China ended up importing over 30 million metric tons of corn. However, it is important to remember China has spent hundreds of millions working to modernize their agricultural production, making better overall yields a true possibility even with poor weather.
Chinese purchases are where demand is lagging the most for corn and soybean exports versus a year ago. Overall corn sales to China are down 2.27 mmt (90 mbu) from last year, while bean sales are down 6.7 mmt (246 mbu).
While in corn, there is plenty of time to make up for a slow start, soybeans remain concerning. Traders believe China has around half of their November purchases left to cover, with all their December and January needs still open. Traditionally we have around 40% of our total soybean export commitments sold by the end of November, making the next 6 weeks of sales incredibly important.
The dollar’s strength will likely have a say in how aggressive we see our foreign buyers in the coming weeks. A stronger dollar makes converting physical bushels into cash more attractive to farmers in Brazil, Russia and around the world, while keeping their offers into the world relatively cheap.
To summarize all these thoughts as best I can; the changing dynamics around the world feel like a powder keg, with grains a follower now more than a leader. How physical bushels can move into the world pipeline will be the true driver in price both on the board and at the farmgate.
Other things I am watching:
- South American weather. A drier start in Argentina and Northern parts of Brazil has slowed planting, while heavy rain in Southern Brazil has resulted in flooding. Conditions are expected to remain dry in the heart of Brazil this week, with both the GFS and Euro in agreement moisture moves in next week. Verification of such is imperative, with delays in bean planting having a direct impact on safrinha corn production.
- Outside market psychology. Money flow is key, with trader sentiment a major driver. How traders feel about what is happening around the world and what it means for commodity values can supersede what cash is saying for short periods of time.
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.
