Sunday Scaries 2023 Version: What I'm Watching in the Grain Markets as We Turn the Calendar to 2023

Here we are, at the end of the year, the last 2 weeks of 2022.

I will not say 2023 will be my year. I’m avoiding eye contact, doing as little as possible to draw attention to myself in hopes things could calm down in the ag space for the first time in 4 or so years.

There’s a lot to be paying attention to, though what will be the main driver as we roll into 2023 remains to be seen. For my last article of 2022, I present to you 2023 Scaries, let’s look at what I will be watching the next 2 weeks and the first few weeks of next year and beyond.

Russia/Ukraine: I feel like the grain markets have grown tired of chasing Black Sea headlines, pulling most, if not all, of the war premium out of the market over the last couple of months. The situation hasn’t necessarily improved, in fact one could argue the Russian aggression has gotten worse as attacks on infrastructure increase and Ukrainian citizens find themselves without heat, water and power across the country.

When it comes to grain shipments though, I think many traders recognize now that the UN, US and others will do all they can to facilitate the shipment of grain out of the Black Sea. Russia has a record large wheat crop, with a major need to acquire cash as well, meaning Putin will likely push as far as he can when it comes to threatening to disrupt shipments, without actually impeding movement long-term.

What I’m watching in this space: the US and others are increasing the level of weapons they are providing to the cause, angering Russia. Whether this is seen as a reason to amplify aggression further and if Russia even has the firepower to do so remains to be seen.

Negotiations between Russia and the UN on facilitating fertilizer and grain shipments continue as well, with limited progress reported. While at the same time Ukraine remains steadfast the war will only end when Russia agrees to leave Crimea and other occupied regions.

Bottom-line, the war is likely to continue for the foreseeable future and the longer it continues the more comfortable the world end user gets with a certain level of unknowns. The continued work behind the scenes between world leaders also likely means we see acute problems impacting grain supply out of the region resolved relatively quickly. Any food shortages seen will be more a result of limited cash than limited supply.

China: What isn’t there to watch in China right now? The government’s rollback of Covid policy was completely unexpected and has resulted in a surge of cases across the country. Reports out of Beijing at the end of last week were dire, with rumors of a spike in deaths and hospitals beginning to be stretched to capacity.

I was bullish first quarter 2023 demand on the reopening initially, but now I’m not as sure. Economic activity last week was down significantly, with traffic congestion across many major cities in the country the lowest seen since January 2021. Malls and retail stores are closed due to lack of employees either because of illness or worry over exposure.

So now while there is basically a guaranteed snap back in demand slated to happen sometime in 2023, experts believe this is the first of 3 major Covid waves the country will see this winter, likely limiting nearby demand through March at least.

Of course, this doesn’t mean we don’t see China continue to purchase as they have a baseline of demand no matter what happens, but optimism over a major short-term surge in demand seems to be waning.

In addition to a continued slowdown when it comes to demand growth, where they supply their needs remains incredibly important as we watch their corn purchases out of Brazil increase. We finally saw import margins for US corn into China move to positive levels a couple of weeks ago, with small sales showing up in weekly export numbers, though purchases of size remain unseen in corn.

Overall demand and where it comes from will have major implications on this year’s ending stocks, with that snowballing into the 2023/24 crop year.

Macro-Things: Yes, I said macro-things and that covers *gestures vaguely* basically everything.

Calls that this past crop year could end up like 2008, where we went from record highs to sub $4.00 corn futures by the end of harvest were obviously premature, though the worry of a significant downturn in price remains. 

Reduced money flow and increased costs of doing business are starting to show across a whole host of sectors in the economy and that is only likely to continue as Jerome Powell and his global cohorts claim they still have a long way to go when it comes to obtaining price stability.

“Don’t fight the Fed” has been the anthem the last 4+ years, with many of the same who had pushed that very narrative remaining bullish on their economic outlook due to the eventual Fed pivot some have been calling for since late summer. 

What this means for the inflation trade seems to be showing up in wheat, with speculators moving to the shortest position seen since May of 2019 a week or so ago. Better returns being seen elsewhere is also limiting speculator interest. A loss of speculator participation is not necessarily a bearish factor, but without depth, rallies will likely be less explosive and shorter lived.

Domestic demand:  The macro-things factor is closely tied to domestic demand as consumer sentiment plays a major role in ethanol and other biofuel demand, and can be seen in meat demand, especially beef.

Risk managers in the ethanol space will tell you margins are incredibly poor, with some reporting some of the worst margins on record for this time of year in the history of their plant. Plants in the west where high corn basis remains are rumored to be slowing production, with ethanol stocks continuing to grow. According to some in the industry we risk losing over 100 million bushels worth of corn demand if we see current trends in fuel demand continue.

Biodiesel took a hit at the start of the month with the EPA’s updated blending mandates. While bio and renewable diesel production and expected demand will continue to grow even without mandates, that growth may not be as aggressive as expected, with the administration pushing electric vehicles over the biofuel driven conversion initially hoped for.

Consumer strength will have a big influence on meat demand in 2023 as well, as a tightening in the household budget when it comes to groceries continues. Consumers will make necessary adjustments when it comes to cuts of meat and type, while also looking to cut into their budget when it comes to dining out.

Many cattle traders have been bullish cattle futures on the idea of reduced supply, though poor demand could weigh heavily on herd recoveries if margins remain pressured, limiting the mouths we have to feed.

La Nina and updated USDA figures round out what I’m watching most closely in the month ahead. Weather models have pointed to a weakening and subsequent breakdown of La Nina beginning the middle of January. With neutral conditions, and even potentially a transition towards El Nino showing in some outlooks, what happens here will have a huge influence on weather and subsequent production in 2023.

La Nina has been behind Brazil’s production losses the last couple of years, with its influence being seen this year in the form of an entrenched Argentina drought. La Nina has also pushed drought conditions across the US to close to 80%, though the recent weakening in atmospheric and oceanic conditions is starting to be seen with a far more active weather pattern across the US.

The USDA’s January stocks report will help us determine final crop size, because of this, the January 12th report is the last real wildcard figure until the end of March. Historically an increase in yields in November has led to increases in January too, though that is not a guarantee.

In the end, we still have a long way to go before we feel confident in true market direction, with factors influencing supply and demand changing almost daily. 

Have a great holiday season, and here’s to a happy and healthy 2023! 

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