What a week for grains last week, and not necessarily in the way we’ve grown accustomed to, as Chicago wheat traded to its lowest level since January and corn has all but erased the supply driven pop we got after the Pro Farmer Crop Tour in August. Soybeans managed to hold their own, gaining 2 on the week, looking mundane if you had missed the rally to multi-month highs and subsequent 40 cent digger mid-week.
Market volatility has seemed to have taken an uptick, if in no other way than daily ranges feeling wider, and while it feels like we have answered a lot of questions over the last handful of weeks, the unknowns that remain in the market structure are the ones most likely to determine if our next move is 50 cents higher or lower.
There was a lot of attention paid to corn spreads this week, as the December/March spread went from 2 cents worth of carry at the start of the week, out to over 13 cents worth of carry with deliveries in the last half.
Some will say the farmer doesn’t need to be concerned with the delivery market and that the strong basis in the West is more of an indication of overall supply and demand dynamics than anything else. And while this may be true, I feel it is important to understand why deliveries matter more from a psychological standpoint in the market than an economic one.
As many have discussed several times over the last handful of years, spreads tend to be an indicator of market direction as they give us insight into the need or desire of the cash market when it comes to accessing supplies. As with other physical commodities markets build in carry to incentivize storage of supplies, or they remove that carry moving to ‘charge’ those storing supplies through an inverse.
The shift in global market psychology from “just in time” to “just in case” was well documented throughout 2021 into 2022 as market analysts and traders pointed to inverted cash markets and strong export demand as a sign global end users would no longer be as hand to mouth with their purchases as we had grown accustomed to in the pre-Covid world.
However, as with any market, everything is cyclical with many of these end users finding stockpiling grain or simply just buying it at any cost is unnecessarily expensive and risky. The recognition that the market will work to stretch supplies as needed and in all honesty no matter what happens we won’t run completely out of grain has pushed those end users previously seen rushing to source supplies, to taking their time on measured purchases.
We have also seen a shift where traditional global end users are now negotiating government to government, cutting out the tender process and sourcing supplies that are the cheapest, or potentially come with a reciprocal trade. This shift in the attitude of the global end user combined with a sharp increase in our offers into the global market due to freight concerns and a higher dollar has weighed heavy on our grain exports, with wheat exports off to one of their worst starts in years and corn sales 48% lower than a year ago at this time.
So while, yes, understanding how interest rates and barge freight impacts a commercials decision to deliver into the Illinois river system does feel very unnecessary for the farmer, deliveries in this instance show me that commercials aren’t afraid to send their bushel babies to a new home early in the season in a recognition that the costs and risks may be too great to try and hold on to them well into the marketing year as we’ve seen the past two seasons.
In addition to what happened in the cash corn market this week, we got an updated proposal from the EPA when it comes to renewable fuels. Ahead of last week’s information drop traders were anticipating a big increase in blending mandates for biomass-based diesel—primarily biodiesel.
Early tax incentives and strength in RINs has pushed for big increases in soybean crush projects, with over 400 million bushels worth of new crush capacity proposed through 2024 on the back of expected increased soy oil demand.
The Biden administration caught many off guard with this week’s proposal putting mandated biomass-based blending levels below current market capacity, only increasing blending requirements by 1% versus the 3-5% expected. In addition to lower blend rates, news about the creation of an eRIN pressured RIN markets, lowering margins for ethanol plants and other renewable fuel producers.
In the eyes of many analysts the news of the eRIN or a RIN that is generated by producing or charging electric vehicles is a sign the administration is in fact working towards its earlier stated electric vehicle goals, something most in the industry believed would take increased biofuel production to help facilitate. This week’s announcement shows that though they are not making moves to restrict growth in biofuels, they may not be the poster child of the green transition many had hoped.
Looking ahead into next week, we get an updated USDA supply and demand report on Friday December 9th. The USDA rarely if ever makes an adjustment to production in this report but has made demand adjustments in the past. With many surprised by the lack of a cut to corn exports last month and a continued poor pace this month it’s likely we could see corn exports reduced. Bean and wheat demand doesn’t really show a need for adjustment to demand, though the USDA may make changes to the global balance sheet.
Otherwise, we head into the abyss that is the last part of December likely focusing on the Fed decision and outside market moves.
I guess to wrap up this week’s thoughts I will leave you with this, Kyla Scanlon is one of my very favorite outside market analysts, her ability to take what is happening in a market and break it down into a way anyone can understand is phenomenal. She speaks often of the ‘vibe’ in a market, saying that many times market moves are a self-fulfilling prophecy because of the feel of a market, or the psychology.
I would ask you to pay attention to headlines this week and into next, pay attention to the general feel and be aware of your local market direction and buyer sentiment. While we have a very long way to go before the end of the marketing year, it feels as though we may be encountering a shift in vibe, one from a fear of running out of grain and a need for price spikes to one where we feel we are back to adequate supplies with reduced needs.
A lot can change, and it likely will, but until we see a sharp spike in export demand or can solidify the need for greater concern out of South America, the doldrums may continue.
As always, don’t hesitate to reach out with any questions! Have a great week.
More Grain News from Barchart
- Friday's Last Call, Lots of Markets to Talk About
- Wheat Futures Fall into Weekend
- Soybeans Bounce Back on Friday
- Corn Weakens into Weekend
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