I think this is where I am supposed to lie to you. To feign some level of confidence, that I, the author of this piece, am smarter or have greater insight into what is going to happen next in the markets than you, the reader.
I’m not going to do that though, because I don’t know. No one does. We all have our guesses, some more educated than others, but they’re just that, guesses.
We’ve never really seen a time in history like this one. The signals couldn’t possibly be more mixed, the uncertainty more great—which honestly is something I think I have been saying nearly non-stop for almost 3 years now.
There are several factors at play that will impact grain market direction in the coming weeks, some that will prove to be far more important than others. Top tier of importance is second crop corn production in Brazil. Brazil produced a total corn crop last year of 116 mmt, nearly 75% of which was their second crop corn.
The 30 mmt increase in production from the year prior has pushed this year’s corn exports up by over a billion bushels, cutting into US corn exports in a big way. Official production estimates see another increase in production, though a slower start to planting than seen a year ago with additional heavy rains in the forecast will likely keep progress slow over the next week or so and could start to cut into the production outlook.
We’ve already seen a reduction in production estimates from CONAB, taking their outlook down to 123.7 mmt from 125 mmt last month. This would still be 303 million bushels more production than last year, but something that remains imperative to the market as the optimal planting window closes the first week in March. Planting after doesn’t guarantee a crop failure, but it does open the crop up to a risk of dryness as monsoonal flow shuts down in April in a typical year.
As it stands currently, demand bulls have been somewhat disappointed by export demand. Falling domestic corn values in China thanks to talk of big government reserve releases of rice that will be suitable for feeding as well as large arrivals of imported corn from the US, Brazil and Ukraine have changed China’s once positive import margins on nearby US corn to more of a break even proposition.
The question now becomes if China can buy enough supplemental feed grains to get by until August when Brazil returns to the market with much cheaper corn supplies—that is so long as they are able to produce a corn crop in the ballpark of current expectations. Any signs of a significant production loss could change things in a big way, keeping a risk premium in old crop corn necessary for the time being.
Another top tier fundamental factor to watch is what happens in the outside markets and what that means for commodities. Talk that inflation has peaked has grown quiet as housing supplies remain tight across the country and prices remain elevated. Gasoline prices have increased, used car prices are on the rise again and food prices are unlikely to fall much from current values any time soon.
Several members of the Fed have pointed out that rates are proving to be nowhere near restrictive enough to be close to satisfying their mission. Neel Kashkari, once the Fed’s most prominent dove has indicated he feels rates move towards 5.4%, while bets the terminal rate moves towards 6% by September are on the rise.
The job market outside of the tech industry remains incredibly resilient in the face of all that is happening, indicating business leaders do not seem to be too concerned we will see a significant economic downturn. Powell has mentioned disinflation more than a handful of times the last two weeks, with the market now poised to prove whether that is the case or not. We will get two consumer price reports before the next Fed decision, with the next coming on Tuesday.
With all of that, we also have what appears to be increasing geo-political risk. The Chinese balloon story and subsequent shooting down of several unidentified flying objects by countries around the world will prove to be a big deal of sorts, or it won’t (remember all those people dressed up as clowns?), though it appears based on early data from the initial balloon shot down there could be more there than just climatological research.
The relationship between the US and China is already incredibly tense. It appeared after the G-20 summit in November we could see some cooling there, with agreements potentially being reached on a whole host of trade issues. However, the discovery of the balloon had Secretary of State Blinken delay his China trip, the first such trip by that high ranking of a US official in nearly 5 years. China of course, says the US is overreacting, though they now appear to have an object they themselves intend to shoot down they have discovered in their airspace.
Newly appointed Speaker of the House McCarthy is expected to travel to Taiwan soon as well, ignoring all warnings out of China. With China our largest grain buyer, the relationship remains incredibly important, especially if Brazil continues to produce crops inline or bigger than current estimates.
We’re now 6 weeks away from the end of the second phase of the Black Sea Grain Corridor agreement as well, so be prepared for an increase in risk premium on ideas the corridor will not be extended. Russia began its litany of complaints about the EU not helping facilitate its exports, while it forecasts record large grain exports on the year out of the other side of its mouth.
Wait times through the Bosphorus Strait are reportedly nearing 50 days now though, so the uncertainty regarding the will they or won’t they when it comes to an extension will likely limit any new business. The Russian offensive is expected to increase as well, just ahead of the arrival of tanks and other Western military equipment slated to arrive in March. Worries this could hit export infrastructure will likely result in increased risk premium as well, especially after seeing wheat fall to 2021 values.
While these three factors appear to be drivers in the market this week and beyond, we will also want to keep an eye on what is happening in soybean meal, where a reported short-term shortage of physical product has sent the meal market soaring. Strength in meal is keeping beans strong, even in the face of increasing Brazilian supplies.
Argentina production will remain important in the market as well, though increased available supplies out of Brazil is likely to dampen the impact of what has been the worst drought in decades. Argentina crushers are able to maintain positive crush margins even with imported Brazilian beans, likely to keep their meal exports somewhat supported in time. Weather-wise showers remain in the forecast, though nowhere near enough to replenish sub soil moisture or alleviate drought conditions.
In the end, we remain violently range bound until we don’t. I don’t say that to sound trite, I say it because it’s true. Time will answer a lot of these questions, with a reason to break out one way or another waiting in the wings.Â
As always, don’t hesitate to reach out with any questions. Have a great week!
More Grain News from Barchart
- Sharp Rally for Wheat Futures
- Strong Close for Friday Soy Market
- Corn Futures Rallied into Weekend
- Coffee Posts Moderate Gains on Smaller Brazil Coffee Exports
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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