It’s time to change it up a little bit when it comes to talking about what I’m watching in the week ahead. We’ve reached the time of year where the major fundamental stories are set. We know a great amount of price direction will rely on Chinese demand potential with supply, of course, being another great contributing factor.
The only thing that answers the looming questions that we have now over supply and demand is what actually happens in the physical space.
I always say physical grain doesn’t move; it oozes. This means nothing ever gets from where it is to where it is needed as quickly as the market would like it to, but it does get there eventually.
My place in the ag space is a bit unique, as I actively trade cash grain for my customers throughout the day. My background in the elevator space has given me insight into how cash grain trade and movement take place, helping me get a feel for what may be coming next in a market well ahead of the move itself just by watching what is transpiring in cash markets.
While the main focus when it comes to watching the market is what futures are doing, the actual value paid for a bushel or a ton of grain is influenced by basis and spreads far more than futures values.
Basis is the difference between the futures value traded and the cash price paid for the grain in question. It is a function of local supply and demand. Basis takes into consideration what the futures market says a product is worth, and adds or subtracts value depending on how grain is flowing and what its needs may be in relation to that flow.
Strength in basis is indicative of limited grain flow versus demand. Grain flow can be influenced by a whole host of factors. Recently, freight has been a big contributing factor in the flow of grain, as competition for rail space and poor performance has limited the amount of grain able to move across the country via train. In addition, near record low river levels last fall limited grain movement while increasing cost, impacting basis as well.
Watching freight values is important as a cash trader as it gives potential insight not only into cost structures impacting local basis, as freight is a contributing factor in values paid, it can also give insight into whether or not grain is going to start moving in a certain direction or at an increased amount.
According to traders dealing with the freight market, it seems as though much of the disruption to supply chains has worked its way through the system and we are returning to normal when it comes to demand for goods in our logistics space. Some of the reported poor performance from the railroad has been attributed to increased demand, with the backlog of ships and containers at West coast ports well publicized a year ago.
Now that we have seen that backlog clear up, rail performance has reportedly improved greatly over the last month or two, with expectations of continued improvements, barring short-term weather disruptions.
Barge freight values have fallen more in line with normal from record highs seen last fall. Drafts are limited, with winter weather impacting some grain movement, but things appear to be getting back to normal there from a logistical flow standpoint, nonetheless.
The Baltic Dry Freight Index doesn’t appear to be showing signs of increased commodity demand, with it falling to a 32 month low this week. Values have now fallen back to the low level of the range traded from about 2018 to late 2020 when China started to buy up much of the world’s commodity supply. I’ll be watching ocean freight closely as it would be something bought either in conjunction with or ahead of a big volume of commodity business.
In addition to the ability to move grain, the ability to hold grain influences basis as well. We will likely begin to see some very interesting things happen in the Brazilian cash market as harvest begins to ramp up across the country.
According to Brazilian market analysts Agrinvest, Mato Grosso has around 22 mmt of static storage space in the state. This pales in comparison to the expected 43 mmt of soybeans expected to be harvested in the weeks ahead, as well as an anticipated 43-44 mmt of corn production. With over a million metric ton of soybeans and around 4 mmt of corn left over from last year, storage space is going to come at a premium this year.
This is a situation that is likely to play out across much of the country.
When space comes at a premium basis starts to get sloppy, or really weak as an elevator or commercial enterprise does not want to buy one bushel more than it can hold or resell. Owning bushels you cannot hold or resell is a problem not easily resolved. In this instance grain will be flowing at far too great of a pace versus demand in the market and will likely result in substantially weaker basis values in the weeks ahead.
A pocket of weak basis values in an otherwise strong market can make for interesting moves, especially with better freight performance, as the movement of grain from where it is (weak basis) to where it is needed (strong basis) can be expedited.
Grain flow impacting cash values could be seen this week in both GASC tenders. GASC or Egypt’s grain buying arm was in the market this week for several products, but the results of the corn and wheat tenders caught my attention as I feel they gave great insight into how different the world is now when it comes to perceived grain supply than what it was just 2 years ago.
On the corn side, what I found most interesting was the presence of COFCO in the offers. COFCO is one of China’s state-owned grain traders, and though they have a port in Constanta and like to keep the appearance of being international traders, they haven’t necessarily been seen as a possible supplier in a major tender in quite some time, especially being so competitive in price. Seeing COFCO as a willing corn seller gives me pause when it comes to anticipating impending demand. Yes, arbitrage is a normal part of cash grain, but not something you typically take part in if you feel you don’t have enough available supply to meet your current needs.Â
Second thing I noticed was the sharp uptick in participation in the wheat tender. While many of the offers were of Russian origin there were over 20 offers from at least 13 suppliers. In late 2021 there were instances when 5 offers were hard to come by, with prices substantially higher. The depth of offers in tenders going forward as well as the cash price paid will continue to give great insight into not only global demand, but the attitude and comfort level of global grain supplies and buyers.
Looking ahead, I will be watching the cash markets around the world closely. Grain flow, freight values and tender results will start to put the pieces of the global grain supply and demand puzzle together, it will begin to answer the questions we have about the level of risk premium needed as we work into the new crop production season.
As always, don’t hesitate to reach out with any questions! Have a great week.
More Grain News from Barchart
- Red Close for Friday Wheat Market
- Soymeal Rallies into Weekend
- Corn Prices Close with Gains
- Coffee Prices Close Lower on Weak China Coffee Demand
On the date of publication, Angie Setzer 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. For more information please view the Barchart Disclosure Policy here.
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