Grains feed the world, and in my Q3 report on the sector on Barchart, I wrote:
The path of least resistance for the agricultural products that feed and increasingly power the world remains cloudy as we head into Q4. The war in Ukraine is the most significant factor for the sector, as supplies from Europe’s breadbasket remain questionable. Moreover, since Russia is a world-leading fertilizer producer and exporter, farmers worldwide have experienced soaring prices and declining supplies of fertilizers required to sustain crop production.
The war is bullish for grain and oilseed markets, but an end to the conflict could cause a sudden and brutal price correction for many of the sector members. Meanwhile, each quarter the worldwide population grows by around twenty million people and is approaching the eight billion level. Each year the world requires more gains and oilseeds to feed and fuel a growing number of people. Farmers worldwide need to produce more crops to satisfy requirements as the demand side of the grain balance sheet is ever-growing.
In a more recent article on December 13, I quoted Sal Gilberte, the founder of the Teucrium family of CORN, SOYB, and WEAT ETF products. Sal pointed out that global grain and oilseed production needs to increase in 2023 to loosen the tight balance sheets, improving consumer supply-demand fundamentals. The war in Ukraine is a critical factor for the grains that feed the world because Ukraine and Russia are Europe’s breadbasket, and the Black Sea is a crucial logistical export hub. As we move into 2023, the weather in the leading growing regions, input prices, and the war will determine the path of least resistance of prices after a very volatile 2022.
The overall grain and oilseed sector edged 0.66% lower in Q4 2022 but posted a 1.72% gain in the year that ended on December 30, 2022.
Soybean rally- Crush Spreads soar in Q4
Soybean futures had an impressive fourth quarter, rising 11.32%. The oilseed futures were 14.33% higher in 2022.
The chart highlights the double-digit percentage gain in soybean futures in 2022, following on the heels of gains over the past years. Nearby CBOT soybean futures reached a high of $17.84 per bushel in June 2022, only 10.75 cents below the 2012 record peak. Beans remained in the teens at the end of 2022, settling at $15.1925 on December 30.
Processors crush soybeans into two products, soybean meal, and soybean oil. The meal is a primary ingredient in animal feed and consumable products, and the oil is also a food additive and is required for biodiesel production. Crush spreads reflect the margin for crushing the oilseed into meal and oil and are a real-time indicator of the demand for soybean products. Higher crush spreads tend to support soybean prices, while lower crush spreads can weigh on the oilseed futures.
The crush spread chart shows that aside from two outlier spikes in 2009 and 2014, the spread experienced its most sustained rally in 2022, taking it to a $3.4025 high. At $2.3525 on December 30, 2022, the crush was at an elevated level and moved higher in early January. Nearby soybean meal and oil futures were 18.68% higher and 2.36% lower, respectively, in Q4. In 2022, meal prices gained 16.23%, and oil was 13.34% higher. At over $3 on January 6, the crush tells us the demand for products continues to be robust.
Corn edged higher- Ethanol edged lower in Q4
Nearby CBOT corn futures edged only 0.15% higher in Q4 2022 but moved 14.37% higher last year.
The chart illustrates the bullish price action in corn since the April 2020 $3.0025 low. Two years later, in April 2022, corn futures reached $8.27 per bushel, 16.75 cents shy of the 2012 record high. Corn futures were at the $6.7850 per bushel level on December 30. Corn was lower in early January.
Corn prices rose as Europe’s breadbasket in Ukraine and Russia became a war zone throughout the 2022 crop year. Meanwhile, the ongoing war pushed traditional energy prices higher during the year, putting upward pressure on biofuel prices. In the U.S., corn is the primary input in ethanol production. While nearby Chicago ethanol swaps edged 1.89% lower in Q4, they were 2.64% higher in 2022 after rising 58.4% in 2021. Ethanol reached a record high of $3.45 per gallon wholesale in November 2021.
Wheat declines in Q4
CBOT soft red winter wheat futures are the worldwide benchmark for the grain that is the primary ingredient in bread. In Q4, CBOT wheat fell 14.05% but was still 2.76% higher in 2022.
The chart highlights CBOT wheat futures reached a record $14.2525 per bushel high in March 2022 before correcting. The nearby benchmark wheat futures closed at $7.92 per bushel on December 30, 2022, and was lower in early January.
KCBT hard red winter wheat futures moved 10.44% lower in Q4 but were 10.79% higher in 2022, settling at $8.88 per bushel on December 30. KCBT wheat moved to a significant premium to CBOT wheat in 2022, closing the year at a 96 cents premium for the KCBT wheat. The long-term norm is a 20-30 cents premium. Since many U.S. bread manufacturers price their requirements based on KCBT prices, the high premium signifies increased hedging activity and concerns that prices will continue to rise and supplies could become scarce. Russia and Ukraine are leading world wheat-producing countries, and the war dramatically impacted wheat, pushing the CBOT contract to an all-time high.
MGE spring wheat futures fell 4.40% in Q4 and were 4.18% lower for 2022. Spring wheat tends to have high protein levels, making it a requirement for pasta and other grain-based foods. MGE wheat was at the $9.3875 per bushel level on December 30.
Oats fell- Rice rallied in Q4
Nearby oat futures fell 5.83% in Q4 and were 46.23% lower in 2022. Meanwhile, oat’s price soared 89.33% in 2021. The nearby futures settled at $3.6725 per bushel on December 30.
Rough rice futures, the grain that feeds the world, moved 5.13% higher in Q4 2022 and were 23.38% higher on the year, closing at $18.05 per hundredweight on December 30, 2022. Rough rice futures gained 15.29% in 2021.
Issues to watch in 2023
While the weather across the world’s fertile regions is always the most significant factor for annual supplies, the war in Europe’s breadbasket continues to threaten global supplies. The world’s population has reached the eight billion level, and each year more mouths to feed requires more grains and oilseeds. Moreover, as the world moves from traditional energy sources to alternative and renewable fuels, agricultural products feed and increasingly power the earth.
War, trade issues caused by the bifurcation of the world’s nuclear powers, the weather, inflation, and other factors will determine the path of least resistance of grain and oilseed prices in 2023. Since Russia is a leading fertilizer producer, farmers could see prices rise, and availabilities decline, putting upward pressure on prices and downward pressure on crop production.
Expect lots of volatility in the grain and oilseed sector in 2023, and you will not be disappointed. Continuing war could push prices to new all-time highs, while an end to hostilities could cause a significant downside correction. Fasten your seatbelts for 2023.
More Grain News from Barchart
- Money Managers Are Hungry for Soybean Meal Futures
- Sunday Scaries: What I'm Watching This Week in the Grain Markets
- Friday Wheats Stall and Close Red
- New Highs for Soymeal on Friday Soy Rally
On the date of publication, Andrew Hecht 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.
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