Sunday Scaries: What I'm Watching This Week In The Grain Markets

As I have mentioned many times before and I’m sure will mention many times again in the future, I am a cash grain trader first and foremost. I work with farmers in Michigan and across the country helping them manage their sales and guiding them in how to turn the physical bushels produced on their farm into cash. 

In my past life I managed a handful of facilities and all that went into servicing farmers while trying to create margin from having physical grain storage as well.  In this role I was responsible for overseeing grain flow and logistics as well as managing how those same things corresponded to my physical and futures positions. Trading physical grain is something not for the faint of heart as I liken it to the circus act of spinning plates on a stick, but for those that know how it works, it can become addictive as there really is nothing else like it in the world. 

In many ways physical grain is like any other product that is bought or sold in the world. Its value is set by what a buyer is willing to pay, and a seller is willing to let it go for, with both parties having a whole host of factors they take into consideration. 

On the seller side some of those factors at play are the cost of origination with storage and handling, as well as the need to move the grain whether it be for physical space, to generate cash, or because market conditions dictate they do so. Replacement cost can also be a major factor depending on the seller’s role in the market space. 

On the buyer side price is always the main driver. Quality, the ability to get it when it is needed as well as margins downstream, perceived future demand in their market space, as well as perceived future needs in said space all play a role in the value paid as well.

I’m saying all of this to provide a little context into what I want to talk about this week, and why how physical grain is trading around the world matters when it comes to potential price direction in the weeks ahead. 

For anyone paying attention, the move in the May/July corn and bean spreads has been somewhat breathtaking, with both trading to some of the highest levels seen in the last several years. Spreads are supposed to provide insight into cash market fundamentals, with a move like the one we are seeing supposedly signaling a much tighter physical market than perhaps price may be indicating. 

With grain futures having the element of delivery involved, how a spread trades as we get close to first notice day is supposed to provide insight into the availability of physical grain in the marketplace. However, one could argue with the only delivery sector being on the river and managed by a handful of large agricultural conglomerates that is not necessarily the case. 

Instead of looking at spread moves alone I prefer to look at how values are trading elsewhere to get a feel for what is taking place in the overall market. While basis has remained historically strong in the Western Corn Belt and across Illinois, the fact nearly every other corn end user has moved their bids to the July board and is not actively following the spread higher with those bids provides a lot of insight into how eager they may be to extend their current coverage.

In addition to this, it is interesting to hear several reports out of the Eastern Corn Belt of poor bids, or even end users that are no bid until mid-summer, having bought up a good portion of their needs around the first of the year. I argue cash grain does not move, it oozes, meaning it slowly works its way from areas of oversupply and cheap price to areas of lesser supply and stronger prices. It takes its time, but it fills all of the holes in coverage along the way, i.e.: the grain that is sitting in Kentucky unable to find a strong bid will find value in moving further west where end users are paying enough to cover the higher freight costs incurred.   

This solves the problem of lacking supply eventually, with the market rarely able to be precise enough not to find itself overcovered at some point. 

This example could be best seen in how the world wheat market has played out this past year. Cash wheat prices started to surge in late 2020 as Russia moved to restrict exports and end users moved to buy hand over fist, taking advantage of a low in the dollar and covering a shortfall in supply that had come after Covid had ravaged logistics. Global end users moved from a mindset of just in time, to one of just in case, looking to quickly refill reserves and storage, with some doing so no matter the cost. This was seen of course across all commodities with China leading the way. 

The move to refill reserves created an interesting phenomenon where even as prices rallied demand remained strong, with the problem further exacerbated by supply reductions caused by La Nina driven weather problems and then of course Russia’s invasion of Ukraine. 

It is absolutely mind blowing to think no more than a year ago we were talking about worries over food shortages and now we have countries bordering Ukraine restricting inbound grain flow as their bins remain full and their cash market depressed. The depressed cash market for wheat around the world with signs of more than adequate supply when looking at trades negotiated, tender offers and subsequent buying interest has been enough to trigger a sharp sell-off in futures, with rallies capped by upticks in farmer selling seen any time flat price moves higher.

This scenario is starting to play out when looking at Brazilian cash prices, as we see bean values trade to multi-year lows with corn following close behind. Brazilian values remain under pressure with a record corn harvest last summer, a record wheat harvest, a record soybean harvest and another expected record corn harvest to come more than filling storage around the country, with some estimating the shortfall in available space to be well over 75 million metric tons.

The lack of storage and limited demand for that much grain all at once has pushed soybean and corn values to well under CBOT values, widening the difference between US and Brazilian values into the global market and prompting talk of big-time arbitrage opportunities into the US as the year progresses. 

As it stands currently, Brazilian soybeans are running nearly $3.00 a bushel cheaper in the nearby cash market, while Brazilian offers for June or July are running nearly $2.00 a bushel cheaper than US offers for October or November shipment. This spread has prompted talk of import potential of Brazilian beans into the US though many in the industry will argue imports will be limited due to rules surrounding biodiesel production and tax credits. 

With nearly 300 million bushels of soybeans either unsold or sold but not shipped, one could argue imports are not necessarily needed, as economics point more towards a reduction in the amount of beans flowing out of the country this point forward. This worry over potential export demand is starting to spill over into new crop outlooks, as we now find ourselves running nearly 9 mmt (331 mbu) behind last year’s sales pace on new crop beans.

The spread is not as great in corn yet, but it is there, and it is widening as Brazilian farmers find themselves facing a similar situation in corn as they are seeing in beans. The Brazilian domestic market is covered well into summer, with farmers needing to generate cash and unwilling to part with beans trading at multi-year lows. This move has pushed Brazilian cash levels in corn to over 2 year lows and brought them back to being competitive into China June forward.

Not only are values competitive into China, but they are also becoming competitive into the US, with talk of importers looking at Brazilian corn values to bring into the Southeast June forward. Imports of corn have far less restrictions downstream than soybeans potentially, but like beans, it’s not necessarily the imports that move the needle on subsequent ending stocks, but how much exports end up being reduced. 

So, in the end, while what is happening in the May/July corn and bean spreads will likely get a lot of the attention in the week ahead, and for good reason because it is fun to watch, I feel watching the nuances of the cash market around the world as well as continuing to monitor export shipment pace and further sales will better benefit you when determining where this market heads.

As always, let me know if you have any questions! Have a great week.  

• Wheat Rallies Off Friday Lows, Still Red for Close
• Soybeans Drop Into the Weekend
• Corn Closes Lower for Friday
• Cocoa Rallies on Strength in Global Cocoa Demand