Sunday Scaries: What I'm Watching This Week

I’m still trying to get my feet under me when it comes to what I want to write about each week. It seems simple, I have so much to say, but how to organize it in a way that is not only enjoyable to read, but above all else makes sense, that’s where I’m struggling.

I am going to spare all of you and avoid doing a deep dive into soybeans or wheat as I did into corn, though one could be done, with similar arguments.  

Speaking of last week’s deep dive into corn, we did not get that supply surprise to the upside I spoke of but did see the start of what I fear will become multiple cuts to export demand, with the USDA taking 125 million bushels from last month’s expectations.

This week I feel a lot of the focus will be on China. The country’s leadership party kicks off its once every five-year party congress this week, with much fanfare over the expected announcement of Xi’s third term. 

With China such a massive buyer of US grains and soybeans, responsible for a significant amount of the demand increase seen in US corn exports in 2020 and 2021, the direction Xi takes the country in his third term will influence our market direction as well. 

It is interesting to see a social gathering of this size however in the face of the country’s zero-Covid policy, as flare ups across the country have resulted in new lockdowns and regulations. 

In addition to what is happening in China, we will be watching what happens in Ukraine as the situation there continues to escalate. Wheat came within a couple of cents of limit up last Monday as we watched Russia strike several targets in Kyiv and across the country that had been relatively untouched by the war since April, when Putin announced the Eastern shift in focus.

There were two major classes of worry when the bombings of Western targets began, the first being the war would shift back to the west, further limiting Ukraine’s ability to produce crops. With over one third of Ukrainian wheat area in the oblasts nearest to the conflicts, we are already going to see a sharp drop in planted acreage this fall no matter what. 
In addition to the worry over further production loss, there remains concern Putin will attempt to block the grain corridor after the first phase ends next month. This week Putin wrote the UN saying at this point he does not support another phase of the corridor, continuing to falsely claim the grain being shipped out of Ukraine is not going to hungry nations and that the Russian side of the deal is not being met.

The “Russian side of the deal” according to experts is that the UN makes it possible for Russia to export its grain and fertilizer without issue. Russia claims sanctions on banking and credit are limiting its ability to do business, pushing for the UN to roll them back.

My thought on the corridor is it is truly Putin’s last true bargaining chip as the Western world has proven—at least in the warm season—it can find ways to live without Russia. Putin knows how important keeping grain flowing is to not only the UN but to Russia as they need as much cash as possible to fund their war machine and supplies are beginning to back up across the country. 

Putin will push as far as he is able to gain as much traction as possible in rolling back financial sanctions. 

Unfortunately, in cash grain transactions, knowing the grain you purchase will arrive when you purchase it is one of the most important components and with the worry regarding the future of the Black Sea corridor, limited business is being conducted beyond the next couple of weeks. 

I also feel it is important to point out though a shutdown to the corridor now is not the same type of supply shock as felt in February after the initial invasion. Though it is not the prettiest way to conduct export business, Ukraine and the UN have been working on better facilitating rail and road traffic to move grain into Western Europe and beyond. 

The corridor itself has allowed for an additional 7 mmt of grain to be moved into the global pipeline via the Black Sea over the last 90 days, with alternative routes providing upwards of 3-4 mmt of exports per month over that same period. In fact, between the two, Ukraine was able to ship 6.9 mmt of grain in the month of September, more even than what they were able to export monthly ahead of the conflict.

Of course, the backlog of grain remains in the heart of the country, with farmers less than enthused to begin harvesting the 2022 crop with the 2021 crop still in the bin. 

The financial health of the Ukrainian farmer worries me more long-term than the health of the corridor, as many are seeing interior cash prices still trading below $3.00 in some instances, with costs remaining incredibly elevated due to the war. Lacking margin and incredible uncertainty may have a greater influence on the future of Ukrainian agriculture than anything else if left unchecked.

Speaking of being able to conduct export business. Not all is well in the US right now when it comes to logistics, as near record low water levels throughout our river system and the continued threat of a rail strike keep the situation here uncertain as well.

Poor performance and uncertainty over future staffing has kept rail rates elevated, playing a role in extremely high basis levels being paid by cattle feeders in the Southern Plains. 

The inability to access barges and keep grain moving has had the opposite effect on basis along the river system and throughout the Eastern Corn Belt as near record low basis levels are being reported in some locations, as the grain simply cannot move.

With our export outlook already struggling and Brazil seeing a fast start to planting, we needed to ship all the beans that we could between October and January this year. Little in the way of improvement to water levels is expected over the next several weeks, though backlogs are easing, dredging operations are working and movement of much lighter than normal barge tows will be seen.

Overall, the volatility is likely to continue as I have not even touched on what is happening in the outside market structure. The news is plentiful, but limited in freshness, so be careful not to take any one development too seriously as it could very well be offset by the next. 

Reach out if you ever have any questions. Have a great week! 

More Grain News from Barchart

• ~30 Cent Losses in Friday Wheat
• Soy Market Fades into Weekend
• Corn Closes Near Lows on 8c Loss
• Coffee Prices Slide on Improved Prospects for Brazil's Coffee Crop