Grain Market Confusion: Why Cash, Weather, and Geopolitics Point To A Possible Change In Price Trends

You may be starting to catch a vibe from me that I’m feeling a little befuddled and a lot frustrated by these markets. If you haven’t, then perhaps I’ll work to make it a little more clear going forward. I have been trading cash grain for nearly 20 years and this is one of the first times I can remember when even the smartest people I know in the industry are surprised by its behavior.

There are several things I am watching in this market that sing a slightly different tune than what futures are saying. Several factors that I believe continue to bear watching as we work into this week and beyond, even with futures testing February lows in corn just prior to this writing.

Spreads

Spreads are one of the first things anyone who wants to trade grain learns about. While basis is a function of local supply and demand, helping to accelerate or slow the pace of grain movement by interacting with futures to provide a cash value, spreads give insight into how the market feels about grain movement overall.

In short, spreads work to encourage or discourage the holding of grain, telling market watchers and participants whether there is enough grain moving to satisfy nearby demand. In a carry market, when the front month is trading less than deferred contracts, the spreads are telling us grain movement is more than adequate, with futures working to cover the cost of holding bushels out of the pipeline. In an inverted market the opposite is true, as the market is working to punish the holder of bushels by paying less later than it is paying right now.

To break it down even further, a carry market, or weakening spreads provides more incentive to hold bushels and is considered a bearish signal, while an inverted market or strengthening spreads, where carry is dissipating, is a bullish one.

When looking at spreads here in the nearby timeframe, especially in soybeans, something seems off. From a historical perspective the July/November soybean spread is trading at a level that would be associated with a far tighter ending stocks outlook than what is projected today. I mentioned this in last week’s article, saying many originators and merchandisers were scratching their heads about the strength, only to see that signal grow louder by the day over the last week.

While corn spreads are not inverted, to see the July/September trade in to around 2 cents of carry, before widening back out and finding comfort trading at around a nickel worth, is interesting in a market structure that shouldn’t be scrambling for bushels due to plentiful supply and should be looking to at least cover the 4 cents per bushel per month of storage costs.

Of course, while I have been arguing for months that the slower than expected pace of farmer selling would have some level of impact on how the cash market would develop into the summer, I struggle to believe it's the lack of farmer movement only that is behind the situation in beans. With one well respected analyst recently pointing that the spread action is more indicative of a 200 million bushel bean carryout versus the 350 million bushels currently projected, this week’s quarterly stocks report carries with it far more weight than possibly even the updated acreage figure that has so far been the major focus.

Weather

You can say the US weather has been non-threatening so far this year, but I feel that sentiment would be disingenuous. We have seen record setting rainfall across parts of the Northwestern Corn Belt, with flooding hitting upwards of 8 million acres of farmland and growing. How heavy rain impacts the production outlook is difficult to pin down, with the thought that only 5% of the total corn acres impacted should be considered lost, while another 10% or so will see yield reductions. For soybeans the ratio of flooding to production loss is likely much higher, though far more difficult to assess.  

For me personally, I think it is far too soon to say the extent of damage to the crops but am quick to remember how nonchalant I was when it came to production losses seen from the derecho in 2020. While I’m obviously not saying these two events have the same level of production loss nationwide, I do feel it is important to remember the long tale these types of events can have, especially when they are unprecedented to a certain extent.

While there is rain in the forecast for the driest parts of the Corn Belt this week, bringing with it much needed relief, meteorologists are pointing to an increased risk of drought development across a good portion of the Eastern Corn Belt. Heat, especially without a cooldown overnight can prove extremely detrimental to yield, even when accompanied by rain, making the above normal temperature outlook for the month of July something to keep an eye on.

While the weather is not necessarily worrisome in the US or so they say, there are real worries developing over the crop outlook in China. Henan, Hebei and Shandong are three of China’s largest corn producing provinces, and all are struggling with above normal temperatures and below normal rain. State television has reported over 3 million acres of cropland remains unplanted in the Henan province with farmers waiting for conditions to improve. While much of the area is said to be irrigated, issues with wells and an antiquated irrigation system are making it difficult for farmers to compete with heat and a multi-month dry stretch.

This in addition to other problem spots around the world, from blistering heat and a slow start to monsoonal flow in India, to too much moisture and cooler than normal temperatures across the Canadian Prairies, Mother Nature seems intent to prove she remains in charge.

Geopolitics Influencing Grain Flow

Finally, we can’t underestimate the power of geopolitics on farmer selling. Brazil and Argentina both have plentiful supplies on hand, with reports it is barely moving. Both countries are seeing interesting transitions when it comes to how their leadership is tackling their economies. In Argentina the outlook appears to be improving, though many of Milei’s programs may still see incredible pushback from union members around the country. Argentina farmers have grown used to having a soy or corn dollar to help incentivize selling, with many looking like they will only sell whatever bushels necessary to cover cash needs.

Farmers in Brazil are looking at rising inflation and a government that cannot find a way to resolve a $25 billion budget shortfall. The uncertainty is pushing farmers to hold tight to supplies, with an increase in new crop bartering for inputs reported.

Many in the industry have been caught off guard by slower than expected grain movement, and I am not expecting that to change anytime soon in South America without some type of government intervention.

In the end, there are plenty of factors at play I’m continuing to watch that could have a major impact on price as we head into July. As always, don’t hesitate to reach out with any questions! Have a great week. 

• Wheat Extending Slide on Monday
• Corn Feeling Pressure from Wet Forecast
• Soybeans Pushing Higher at Midday
• Sugar Climbs on the Outlook for India to Maintain Sugar Export Restrictions