Commentary provided by Chad Burlet of Third Street AG Investments

Over the past several years the USDA’s September stocks report has earned the reputation of being one of the most volatile of the year, and this year’s report did not disappoint. November soybean futures had a 50 cent trading range in the 29-1/2 days leading up to the report and a 46 cent trading range in the 35 minutes following its release. Even though this is scheduled as a stocks report the USDA has made it clear that they will revise old crop corn and soybean production if their data indicates a change is needed. That’s exactly what they did, reducing last year’s corn production by 71 million bushels (MB) and raising soybean production by 81 MB. As a result, corn futures made their monthly high today and soybean futures made their monthly lows. For the month, corn was slightly higher and soybeans were almost 3% lower. For November soybean futures these are the lowest prices since June and there has been only one daily settlement lower than today’s since the first half of April.

A month ago Hurricane Ida had just hit the gulf coast and we were trying to determine how quickly the gulf export elevators would be operational. The recovery was much slower than expected, not because of damage to the facilities but because of damage to Louisiana’s electrical grid. That turned out to be unfortunate foreshadowing as much of the agricultural world is now dealing with electrical shortages, power dislocations and spiking energy prices.

Agricultural products and energy products are tightly linked due to the energy component of renewable fuels like ethanol and biodiesel, and also because energy prices drive production costs, handling costs and processing costs. Fertilizer prices have already spiked to a 13-year high in the U.S. and to an all-time high in parts of Europe. Traders are keenly aware of what that will do to the cost of production for a crop like corn and how that might encourage a switch to other crops. That caused December 2022 corn futures to gain 13 cents on December 2021 futures this month. That is an unprecedented move with prices over $5/bushel.

Harvest is underway in the U.S. and most of the Midwest has had very favorable weather for the past two weeks. Yield reports on corn have been highly variable with fields in the same area differing by nearly 100 bushels per acre (bpa). Soybean yields have also been variable, but not to that extreme. It’s still early, but we don’t expect a big yield change in the October WASDE. The USDA could edge the corn yield down slightly and the soybean yield up slightly.

Chicago wheat futures were only up ½% this month, but world wheat prices were much stronger. The spring wheat crops in the U.S., Canada and Russia were all disappointing and then France ran into serious quality problems with only 30% of their crop grading out as milling quality. As a result, the world’s wheat importers have been aggressive buyers. To complicate matters, Russia has implemented a floating export tax rate that has made it difficult for exporters to manage their risks and has discouraged Russian farmers from selling their crops. Also, key importers like Iran and Pakistan have already purchased as much wheat as the USDA expected them to import over the entire July-June crop year.

On the production side, southern hemisphere crops are doing well and a U.S. crop insurance price over $7 should lead to a 5% increase in our winter wheat acres. However, those crops are not yet available and the world shortage of milling quality wheat will be with us for at least another eight months. One “tail risk” item is the GMO wheat that has been planted in Argentina. No importing country will accept that wheat for human consumption. If that wheat enters commercial channels it will cause a significant problem and could turn the milling quality wheat market explosive.

Looking ahead we are closely monitoring the U.S. harvest and the energy problems around the world. The Chinese government shut 20 soybean processing plants this week because of electricity shortages. If forced shutdowns extend to other agricultural facilities or disrupt the harvest then energy shortages and dislocations will become food shortages and dislocations. The state-run economy appears to be having as much or more difficulty dealing with these issues as the free market economies are having.

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