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

I’ve struggled more this week with what to write about than in previous weeks. Of course there is a ton to talk about, but in complete honesty, not much of it has changed from last week.

Yes, I am watching what is happening with the Black Sea Grain Corridor as the West starts sending tanks and other equipment to Ukraine, something Russia calls a ‘blatant provocation.’ With the corridor’s renewal less than 2 months away, it is likely we will start to hear more about a potential closure as Russia knows the corridor is one of the few bargaining chips it has.

I’m also continuing to watch what is happening when it comes to South American production. Harvest looks like it will continue to ramp up across Brazil, with reports of massive soybean yields coming out of Mato Grosso. Some cash traders in the country say the crop in their opinion is working towards 155 mmt, up from the current working trade estimate of around 153 mmt.

Rains in Argentina over the last couple of weeks were relatively decent and relatively widespread, though not enough to cure the drought of course, and not enough to fix the production loss in early planted crops. It will be enough to stabilize later planted production and allow farmers in the country to finish planting corn.

The forecast for the next two weeks turns back dry, with warmer temperatures, making model runs this week for the last half of February that much more important.

And of course, you know I’m trying to gauge Chinese demand as the country reopens and its leaders claim the worst of the Covid infections are over. Many have been surprised recently by the strong pace in soybean sales and shipments, but with many Chinese crushers reportedly running on limited inventory and nearby margins solid, it shouldn’t be surprising importers are ramping up buys.

As of this week China had around 5 mmt of beans purchased from the US but not yet shipped, meaning big export inspections for shipments to China are likely to continue through February. Continued purchases would be bullish, especially with values out of Brazil starting to get cheaper for March forward.

But what I really want to talk about after thinking about it for some time is the situation in corn…

When thinking about the outlook for corn a Robert Frost poem popped into my head. Me, not really a Frost fan was surprised by this, but nonetheless once I googled it, I realized it fit perfectly:

The Road Not Taken

Robert Frost 

Two roads diverged in a yellow wood,

And sorry I could not travel both

And be one traveler, long I stood

And looked down one as far as I could

To where it bent in the undergrowth;

While the poem itself is better known for its final lines talking about choosing the road less traveled, the first stanza encapsulates my feelings towards the corn market perfectly. In my opinion we are standing at a fork in the road, one leading to an incredibly bullish outlook, the other, potentially the opposite.

And while I know we can only go down one road, recognizing where it leads only once we get there, I feel like we’re currently standing at the fork, staring at a divergence that could have tremendous implications for price direction.

The knowns in the market feel somewhat comfortable. Thanks to a massive year over year increase in production, Brazil was able to export around 1 billion bushels more into the global market since last summer. Corn demand for ethanol looks like it will stay relatively steady for the most part, as plants continue to try to produce themselves into profitability. Feed demand looks like it could be reduced slightly for wheat feedings, but that appears to be more of a global factor than a domestic one.

Where the paths split is influenced almost solely by exports, with the implications being huge when it comes to price.

Path one is the bullish path, probably the corn growers favorite, and feels like the one most farmers and traders are positioned for. With the surprising reduction in corn production earlier this month, we have lost our buffer when it comes to an uptick in demand.

Yes, export pace is abysmal at best, still running around half of what it was a year ago, but the US is now the cheapest and most reliable supplier for the next several months.

Some analysts in the industry believe the absence of competition combined with an uptick in demand from China and other end users coming in for coverage could result in the US needing to supply upwards of 300 million bushels a month into the global market from February or March out into July, double our recent pace.

This with no loss seen in Brazilian second crop corn production. A production issue in Brazil this year would result in the US being the supplier of necessity well beyond July, something our current supply would have a difficult time supporting.

The second path is the path ‘old corn’ used to take, you know, corn before 2021, inflation, several production issues and a huge spike in demand happened. Down that path exports remain lukewarm at best. Yes, we get demand, we see an uptick in sales pace from both a seasonal standpoint and purely from the fact that our top buyers are running well-behind last year when it comes to purchases, Japan and China the most notable, with purchases down 59% and 68% from a year ago. But it’s nothing better than the current pace, steady, but still barely enough to meet current USDA projections.

My gut tells me we head down path two, I feel like Brazilian exports have replaced US bushels in a big way and that global end users have known the world market would be in this situation for several months, yet don’t seem overly concerned.

However, Brazil is just now beginning to plant its Safrinha crop, which is responsible for 2/3rds or more of its total production, meaning we have a whole lot of time left to be holding our breath. US production matters as well of course, keeping a risk premium necessary.

Going forward, I think the market remains very aware of the two directions we could take, but with demand able to show up seemingly overnight, the threat of path one will keep us supported well into spring.

In the end, I’ve never felt so torn about market potential than I do right now when it comes to corn. Beans have relatively known fundamentals, with the tight supply situation becoming more of a US issue than a global one in the coming months. Wheat, much the same. But corn, corn is likely to keep me up at night wondering what happens and how to manage it for quite some time.

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

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