It’s hard to believe it’s been a year since I started writing “Sunday Scaries.” A lot has changed over that time, most notably prices, with nearby soybean futures trading nearly a dollar lower, corn off $1.40 and Chicago wheat down an astonishing $3.65.
Looking back at the last years’ worth of market developments, it is easy to see why so many of us are tired. Many of the same unanswered questions remain drivers in market direction. Geopolitical developments can change sentiment at the drop of a hat, with increasing uncertainty over the health of the global economy sending conflicting signals. Much of this uncertainty has made for reduced volume and interest in ag commodities, with speculators finding other places to put their money.
As I said, when it comes to what I am watching this week, many of the topics I was focused on a year ago remain the same. The situation in Ukraine and the Black Sea has not improved, even if prices would suggest it has. A sharp rally on Thursday after reports a Turkish flagged ship had hit a mine on its way to Romanian ports shows just how tense that situation remains.
Putin and Russia’s grain trading commission have both complained about low grain prices recently, saying the current world values being paid for wheat are too cheap and below the cost of production. RusGrain blamed speculators in a tweet last week, ignoring the fact that Russian trades happening behind closed doors well below public values are actively undercutting the world market.
I have talked about the importance of following the cash market around the world to get a feel for futures market direction often over the last year. This is something that remains incredibly important today, with the situation in the wheat market a perfect example of why.
The trends in the world cash market are an important indicator of price direction because they give us an indication of what any commodity is *actually* worth. The transparency in the physical market is one of the most beautiful aspects of the agricultural commodity markets.
The depth and value of offers and how they are received by buyers in the physical market remain the most important factors. Factors that even if overwhelmed by money flow for a short period of time, remain the true determinant when it comes to value, cash is king after all.
So having said that, let’s look at what is happening in the cash markets around the world this week.
Speaking of wheat, all eyes remain on the Black Sea, with Ukraine increasing the flow of ships through their humanitarian corridor, accessing their deep seaports once covered by the Black Sea Grain Initiative. Wheat offers remain plentiful around the world, with Ukraine, the EU and the US all well below last year’s pace when it comes to exports. We have seen some interest as of late in US wheat as quality issues around the world have pushed buyers to source higher quality supplies for blending.
World buyers continue to struggle with access to funds, looking to buy more hand to mouth as storage costs have soared with rising interest rates. Egypt is the perfect example of slower world demand, even with prices down substantially from a year ago and offers far more plentiful, the world’s most public importer continues to buy just a portion of what they were sourcing in tenders last year.
There was talk this week private talks were taking place between Egypt and Russian sellers. Traders believed Egypt was looking to secure upwards of 1 million metric tons of wheat but traders say nothing was traded.
China remains the world’s most dominant importer, securing a large amount of French wheat in recent weeks, before buying wheat from the US. El Nino is expected to reduce supply availability out of Australia in a big way this year. There is some discussion though that much of that supply reduction will be in lower quality feed wheat supplies, with the core of the Aussie wheat export program likely to remain intact.
One positive factor seen in wheat recently was the stabilization in cash offers even in the face of the recent price break seen at the end of September. The 40 cent drop in wheat futures seen on the CBOT after the USDA report did not translate to lower offers, showing that though we have abundant supplies, higher replacement costs down the road will likely keep a floor under cash values for now.
When looking at corn and beans, the situation is a touch different as we are just getting harvest underway in the Northern Hemisphere, limiting the amount of supply currently working its way through the world pipeline. Brazil’s record corn and soybean crops continue to act as limiting factors to US export demand, with Brazilian offers competitively priced as we enter what is our traditional export sales window.
China returns from holiday this week and will have great influence on market direction. Crushers in the country have been sourcing beans from Brazil and Argentina for the October/November time period and are thought to have around 20 million metric tons of soybeans left to buy for delivery for November out through January. Brazil and Argentina are both running short on available supplies, though they remain competitive in price thanks to currency conversion rates and poor crush margins in both countries.
With soybean export sales running over 9 million metric tons below last year, a drop of 342 million bushels and down nearly a third, we need to see Chinese buyers come to the US in a big way over the next handful of weeks. Weather in Brazil remains hot and a bit drier than usual in parts of the country and will need to be watched as well but so far meteorologists and farmers remain mostly unconcerned.
New crop corn sales aren’t lagging last year’s pace quite like we are seeing in soybeans, but they are lagging the pace needed to meet USDA estimates. Whether the Ukrainian corridor can become fully operational will have a big impact on corn prices, as Ukrainian traders will likely do all they can to push supplies into the world market as quickly as possible if the corridor is seen as workable.
The USDA and others estimate Ukraine will have upwards of 19 million metric tons of corn to sell into the world market. With domestic prices in Ukraine remaining well below world values, traders say there is upwards of a buck worth of margin available if you’re able to make sales work out of Odesa or surrounding ports. This 19 mmt of available supply will enter the world market just as Brazilian traders are looking to wrap up their corn export program to make room for beans.
Some believe Brazilian exporters have nearly 20 million metric tons of corn they will be looking to sell into the world market by the end of November.
With both Brazil and Ukraine looking to enter the world market with nearly 1.6 billion worth of combined exportable supplies in short order, it will be interesting to see what additional business the US is able to pick up that isn’t logistical or quality driven.
Other things I am watching this week:
- Outside market sentiment. Traders have been expecting a Fed pivot since the first rate increase it seems, with some getting closer to finally being right. However, Friday’s jobs data and other information seems to point to a recognition that higher for longer isn’t just a catchy phrase. Some feel the pinch from rate increases is only just starting to be seen, and with many corporations and households still actively tapping into credit, the worst could be yet to come. The state of the consumer and the world economy will have a bigger influence on grain prices than in the past thanks to biofuels.
- Borrowing rates. Accessing cash will have big costs, while having cash will provide better opportunities, something that is the opposite of the way it has been for most of our adult lives. A change in interest rates is behind increased storage rates, greater carry in commodity markets, a slowdown in demand and so much more. Its influence is going to be seen in a variety of ways.
- USDA update. We will get an update from the USDA this week with more actual yield data from NASS and a look at the World Ag Outlook Board’s thoughts on demand and world production. More fine tuned information.
All in all, markets are likely to remain choppy, though headline risk seems to be on the rise as geopolitical tensions grow. Cash will remain king, with grain flow the driver. 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.
