Commentary provided by Chad Burlet of Third Street AG Investments

The line of dominoes known as supply chain disruptions finally reached the energy markets, causing coal, European natural gas, and crude oil prices to spike. West Texas Intermediate crude traded to new seven-year highs and crude oil futures ended the month up 11%. Those moves helped drive palm oil to record highs and greatly enhanced processing margins for ethanol, bio-diesel and renewable diesel. Ethanol prices were also up 11% and soybean oil was up 4.4%. Because of the large U.S. crops and the increased value of their bi-products, many U.S. corn and soybean processors are earning more than two dollars per bushel in the cash market.

The energy price spike also drove fertilizer prices sharply higher. China and Russia, both large exporters, quickly moved to protect domestic supplies by restricting exports. Prices in some markets have doubled or tripled from a year ago and many suppliers won’t quote firm prices for next spring. Concerns about lost acres or reduced yields are impacting major markets including U.S. corn and European wheat.

Higher energy prices also supported the argument that inflation is more permanent than transitory and helped to draw global macro investors into the agricultural markets. In addition, the latest draft of Build Back Better includes three sweeteners for agriculture: $1 billion for infrastructure (gas pumps) to support higher blend rates; a four-year extension of the bio-diesel blenders credit; and tax credits for clean (renewable) jet fuel. Those items are not only financially important but they’re also politically important. They confirm the Biden administration’s commitment to renewable fuels as the President heads to Glasgow to work on UN COP26, at the United Nations’ climate change conference.

Historically the wheat markets have been the agricultural market that is the most sensitive to changes in foreign exchange rates. So it was very atypical to see most of the world’s wheat markets making new highs with the dollar index at one-year highs. In the U.S., Minneapolis spring wheat led the parade by rallying $1.38, a 15% increase. It was followed by KC, up 7.4%, and Chicago, up 6.5%. The world wheat markets are tight in general, but – as the Minneapolis move confirmed – they are most tight for high protein milling quality wheat. Russia is expected to be the world’s leading exporter, but their floating export tax has become a significant deterrent and their shipments are running 14% behind last year. Their export tax is up to $69.90/metric ton (MT) which is discouraging farmer selling and helping the domestic market price wheat away from the export market. This has made things particularly difficult for Egypt as Russia typically supplies more than half of their imports. Their current buying pace is their slowest in five years. They are more than 1 MMT behind last year’s pace despite a USDA projection that their imports will be up 0.9 MMT. Weather watchers are paying close attention to the harvests in Argentina and Australia and to winter wheat planting in the U.S., EU and FSU. Northern hemisphere acres are projected to increase nicely, but current conditions are making that difficult.

If the wheat market has been the engine that pulled markets higher, soybeans have most certainly been the caboose. The USDA increased their U.S. production estimate by two MMT in the October WASDE and it’s expected to add another one MMT this month. At the same time Chinese buying is far behind last year and the Brazilian crop has a long tail. Brazil is competitive with the U.S. for December and is cheaper than the U.S. for February. Despite the strong rally in soybean oil, soybean futures ended the month 1.6% lower.

The corn market was up almost as much as Chicago wheat, closing 5.9% higher. The market was well supported by wheat and a huge rally in ethanol. Mexico has been a strong buyer in the export market and their current 17 MMT import estimate could be improved by another 1-2 MMT. The market was also relieved to get official confirmation that Mexico’s GMO ban will not apply to feed corn imports from the U.S.

The U.S. is seeing increased competition in the export market, particularly from Argentina where the September-October exports were a near record and daily sales registrations are averaging almost 0.3 MMT. In addition, Ukraine’s yield reports are improving and Brazil’s planting of summer corn is going well. The biggest variable in the corn balance sheet continues to be Chinese imports where estimates range from 20-30 MMT. Given that they already own 18-20 MMT, those low end estimates would have them completely out of the international market for the next six months.

For the next few months South American weather will be the dominant variable. That will be followed closely by the size and pace of Chinese buying of corn, wheat, and soybeans. Third will be outside markets like energies and currencies and what they might do to encourage capital to enter or exit our markets.

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