Sunday Scaries: What I'm Watching in the Grain Markets This Week

It’s hard to believe Thanksgiving is over here in the US, as I’m pretty sure we just celebrated the calendar rolling over to 2022. As I discussed last week, in a normal year the month of December is relatively ‘chill’ as the kids say, quiet trade, moderate cash markets and a whole lot of people with “out of office” responses all cued up and ready to go for the last half of the month. 

Looking at a run through of potentially market moving things I’m watching, the only thing ‘chill’ in December this year is probably going to be the temperatures. So, let’s look at what happened last week, what’s happening this week and how it may matter to the grain markets in the month ahead. 

I feel like a broken record, but the biggest market factor I am watching is China and what happens there as Covid continues to spread and citizens are becoming increasingly angry over lockdowns and restrictions. 

Over the weekend unprecedented protests spread across the country—mostly at its universities—after a fire in an apartment complex in the Xinjiang region killed 10 people and injured more. According to since removed social media posts, citizens claim the loss of life was caused by Covid restrictions as the building was under quarantine orders. 

Videos showed people trapped and unable to leave their apartments due to doors being locked from the outside, with reports of fire trucks unable to access the complex due to barricades. The area where the fire occurred has been under lockdown since August, with limited signs of reopening as case counts there continue to show spread risks.  

Some citizens went so far as to chant for Chinese President Xi to step down, something that is again unprecedented and dangerous, especially considering the steps Xi just took to remove any dissenters from his government.

While those who have been calling for a pivot by the Chinese government when it comes to covid controls for weeks now say this will in fact be the turning point, others with far more insight into Xi’s way of thinking feel a much greater crackdown could be coming. 

In any event, what is happening in China is creating interesting market dynamics there, with poor logistics and questions regarding future ability to access supplies if regions continue to see restrictions keeping domestic prices elevated.

As it stands currently US corn export sales are running at just over half of last year’s pace, with 699 million bushels sold, down 655 million bushels from last year at this time. China accounts for a significant portion of that reduction, with many market bulls counting on their return to the market in early 2023. 

We are seeing indications of Chinese demand that had otherwise been quiet, with shipments out of Brazil beginning this past week. Analysts are conflicted on just how much of China’s corn demand Brazil will be able to take from the US and Ukraine, with initial thoughts indicating Brazil will take upwards of 5 mmt of the expected 18 mmt of Chinese demand in 2023. 

It is amazing to think about the growth in Brazilian corn exports, up over a billion bushels since the 2020/21 crop year. But it is also important to take into consideration current estimates by the USDA anticipate a 10 million metric ton increase in corn production in the coming crop year, but only a 2.5 mmt increase in exports, with some of that absorbed by domestic demand obviously but most going to ending stocks—basically meaning Brazil is likely to start building corn reserves. 

In addition to Brazilian corn supplies changing global grain flow, we are seeing the Argentina government step into the market once again, offering their farmers a chance at better exchange levels if they sell their soybeans. 

The initial round of the “soy dollar” introduced in September was far more successful than many traders and analysts had anticipated, with upwards of 10 million metric tons of beans sold by Argentina farmers hoping to generate cash. The big wave of beans sold by farmers pushed whole beans into the export market, something that is unusual from Argentina as they have become known for exporting finished products, meal and oil, not beans. 

The introduction of the new exchange rate basically introduced a chunk of beans into the world market that wouldn’t have necessarily been there otherwise, with the country hitting whole year export projections from the USDA in just one month. It also showed the government what they need to do in the future to encourage sales and generate cash, while teaching farmers to make moves when policies like this are introduced. 

While what it means going forward is simple in the fact that China will pick up this handful of beans at a discount, it could also create a very interesting market dynamic influenced more heavily by government intervention going forward. 

Weather-wise things in Brazil are mostly okay, with decent rainfall. Some are trying to push out maps showing below normal precipitation is in the cards across Brazil, but it is important to remember Brazil’s bean belt averages around 7” of rain a month December through February, so below normal precipitation is relative. 

Argentina is struggling with dryness, with farmers there holding off on planting in the hopes better moisture returns. Pace is slow to start, but farmers have until the end of December to get crops in, with Argentine weather really mattering the last part of December through March.

Outside of China and what is happening in South America both politically and weather-wise, I will be watching developments between Russia and Ukraine. There has been talk of some new shipping insurance regulations coming into play midweek that could impact Russian exports, though I expect anything that could limit Russia grain or fertilizer exports to be short-lived if the UN has anything to say about it. 

There are concerns Russia’s continued strikes on infrastructure could impact export terminals, but so far Russia seems focused on striking the power grids of major cities. The recent withdrawal of troops from Kherson could help facilitate the resumption of exports out of Mykolaiv, something Ukraine has been asking for in the new round of negotiations, though continued fighting in the region keeps that unlikely for now.

I am also watching outside markets and developments from the US and other central banks around the world. What is taking place in China would be enough to create concern over the potential of a global economic slowdown on its own, throwing in the other factors we are dealing with otherwise, it is becoming difficult to see how we avoid a major global recession in 2023. 

What that means for grain prices of course remains to be seen, with weather and production having a final say on direction, however I read a line recently on how it’s difficult to start a bull markets at $6.70 corn and $14.50 beans and that has stuck with me. 

We seem to be transitioning across the board from buying the dips to selling the rips, and honestly I can’t see grains being much different without a big shift in Brazilian weather. 

As always, don’t hesitate to reach out with any questions and have a great week! 

• Soy Futures Fade into Close
• Afternoon Tumble in Wheat Futures
• Corn Bounces into the Weekend
• Coffee Settles Moderately Higher on Signs of Smaller Global Output