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

Corn had a rough week this week, with what appears to be a fund sell-off started by talk of a more bearish long-term outlook. Selling ramped up once certain support levels were breached, with the May board losing 28 cents on the week. Wheat had an even worse week as the world remains amazingly awash in old crop supplies, the July board lost 52 cents. Continued concerns over Argentina crop potential, Chinese pricing and slow Brazilian farmer selling has helped keep soybeans firm even with grains weak, May beans finished the week down 3.

A lot of folks gave a good amount of credit to the USDA’s Ag Outlook Forum projections for this week’s sell off in corn. And while, yes, the numbers released at the forum this week could definitely be seen as bearish, with corn ending stocks projected to grow to 1.8 billion bushels next year from just over 1.2 billion this year, we are a long way from producing the massive corn crop predicted in this week’s figures.

Of course, poor demand remains the 500-pound gorilla in the room, with exports continuing to significantly lag last year’s pace and current USDA projections. Many traders had expected to see a sharp uptick in sales, especially to China as Brazilian supplies dried up and the ship line up to move out of Ukraine grew. We have seen an uptick from previously abysmal sales estimates, but nowhere near what corn bulls were expecting.

China remains the driver in the world market, and they spoke this week with the release of their policy paper on the war in Ukraine. While much of what they said has been met with dismissal by the West, the fact they were clear about the need for the Black Sea Grain Corridor to remain open and functioning properly is a sign we are unlikely to see a significant disruption to the corridor by Russia for fear of alienating their biggest ally.

China has quietly been shipping significant amounts of corn through the corridor recently, accounting for over 30% of total Black Sea corn exports, taking over 3 mmt since August, most of which having shipped since December.

Some traders had anticipated China would take upwards of 8 mmt from the US this spring based on recent purchasing trends and thoughts of import amounts from other suppliers. Others contend we need to see China take at least 4 mmt just to meet current USDA expectations. There were rumors Friday Chinese buyers, or at the very least representatives from the great state of ‘unknown’ were asking for late spring values, though it appears if there were any purchases made, they were minimal.

Talk of Safrinha planting delays in portions of Southern Brazil will likely grow louder this week, as delayed first crop soybean planting due to drier conditions has now run into much above normal precipitation for the last month or more. The above normal precipitation has slowed harvest and impacted Safrinha planting pace, keeping it below the 5 year average and increasing the risk we could see frost disrupt the growing season in the southern regions.

Lots of folks will try to play up Mato Grosso planting delays, though nearly 70% of the crop is expected to be planted by month end, with the remainder planted within 2 weeks of the ‘optimal’ window closing. Frost isn’t the concern necessarily in Mato Grosso when it comes to delayed plantings, more that monsoonal flow could shut down early, causing the crop to finish in heat and dryness.

Current total corn crop estimates for Brazil are sitting around 123 mmt, up from last year’s 116 mmt that resulted in record corn exports. Progress in planting over the next 2 weeks will likely have major implications on future production outlooks and will bear watching as South American crop outlooks will give us insight into whether China will show up as a buyer of US supplies in a big way.

As mentioned, China released a position paper late this week on the war in Ukraine. Much of what they proposed was seen by the West as placating Russia and a non-starter, as the cease fire did not force a withdrawal of Russian forces. The war of words between the US and China seems to be intensifying to a certain extent, with talk of the spy balloon replaced with dire warnings from US officials that China is considering sending lethal aid to Russia.

News that the Biden administration is increasing the amount of troops on Taiwan in addition to sending millions to modernize their military has also angered Chinese officials and is seen as yet another blow to relations.

The likelihood is growing that China will soon do all that they can to avoid benefiting the US in any way, including trade. However, with world supplies still hovering just above pipeline levels in corn, a confirmation of a big South American crop is necessary for them to be able to avoid US supplies in a big enough way to matter.

I’m continuing to watch developments in the Brazilian soybean cash market this week, as harvest in Mato Grosso is trying to work towards completion. Basis levels in the state are reportedly hovering near multi-year, or in some cases record lows, keeping farmer selling slow. The low level of the values being paid could have major implications on the US cash market this summer, with reports of basis as low as two dollars under the board being paid in some regions. Ownership at that kind of level provides for plenty of opportunity later when freight becomes more available.

The slow pace of Brazilian soybean exports in February has surprised some, though the Port of Paranagua has been running on delays of nearly 30 days or more for some time now. While the slow start to the export season has helped provide some bullish ammo for old crop values, spilling over into US sales, it is likely to mean more Brazilian competition into what is usually a strong season for the US. This likelihood has kept new crop soybean sales running well behind average and will bear watching as well.

Outside market developments will remain important as we try to figure out what will happen to the economy if the Fed keeps its foot on the accelerator of tightening monetary policy. We saw Friday’s Personal Consumption Expenditures Price Index data—the Fed’s preferred measure of inflation—come in higher than expected. The fact the economy remains so resilient in the face of a determined Fed is starting to worry some folks much smarter than me that this could end very badly. Others seem less convinced, with even a no-landing scenario somehow getting airplay.

The inflation trade and the buying of commodities on the expectation the Fed keeps monetary policy loose and folks keep buying has underpinned this market, with production woes only adding fuel to the fire. We are starting to face the likelihood supplies stabilize, demand stagnates and the speculator leaves the ag space, a story we’ve seen before with a less than happy ending.

Mother Nature remains in charge though and as we’ve seen across much of the world with heat in India cranking up in February, the conditions in Argentina and a snow storm in Los Angeles, that is not something that leaves me feeling overly confident in much of anything.

In the end, volatility is likely to remain in place, but sentiment is beginning to shift. Be aware of how important psychology is to this market and look no further than wheat to see what happens when short term increases in available supply run face first into demand significantly weakened by a long run of high prices.

As always, don’t hesitate to reach out with any questions, you can reach me at our website www.consusroi.com. Have a great week!

More Grain News from Barchart

• Aussie Dollar: A Currency with Roots to its Harvest Season
• 2-4% Losses for Friday Wheat Futures
• Beans Flipped Red for the Week
• Corn Drops into the Weekend