Commentary provided by Chad Burlet of Third Street AG Investments

January was a month of extreme volatility for the agricultural markets. The two primary drivers of price were the weather in South America and the Russian military buildup along the Ukrainian border. Southern Brazil, Argentina, and Paraguay experienced several days of record heat on the heels of far below-average rainfall. At the same time, Russia positioned over 100,000 troops along the Ukraine border and threatened military action if the West didn’t agree to a series of demands.

For soybean futures, January’s price rise continued the rally that began in early December. At that time, the five major South American soybean-producing countries were expected to produce close to 210 million metric tons (MMT). Today’s estimates are 12-15% below that, with Brazil alone having lost 15-20 MMT. March futures are up more than $2.70 since early December, and the average daily trading range has ballooned up to 30 cents per bushel.

Normally a flat price rally would cause the cash basis to move lower as farmers sell and demand is rationed. However, this year, the Brazilian basis has moved sharply higher, with the March position gaining more than 60 cents per bushel. The early harvest in northern and central Brazil has been delayed by rain, and the line-up of vessels waiting to load has grown to more than 9 MMT, with some vessels waiting nearly a month to load. This has allowed the U.S. PNW to do several cargoes of spot business as inventories at some Chinese crushers run dangerously low.

Surprisingly, the incremental business for the U.S. has not been limited to the nearby positions. Over the past few weeks, U.S. exporters have made a number of sales for shipment in August and September. The U.S. had not been expected to compete until harvest, but the drop in the Brazilian crop is reducing their export availability. In the January WASDE, the USDA estimated Brazilian exports at 94 MMT. Current estimates by private analysts are 7-10 MMT lower than that. The world will look to the U.S. to make up most of that shortfall.

South America is also a key corn-producing region, but corn’s crucial weather months come later than soybeans. South America’s two largest corn crops are the summer crop in Argentina and the safrinha, or second, crop in Brazil. The Argentine corn crop was just planted, and the safrinha crop is only 20% planted.

While weather pressures the row crops in South America, military and political pressure has the wheat market on edge. Together, Ukraine and Russia have made the Black Sea the single largest wheat exporting region globally. The USDA expects those two countries to export more than 59 MMT of wheat this year. Last summer’s drought in north-central North America significantly reduced both the U.S. and Canadian wheat crops, so there are few viable alternatives if Black Sea shipments are interrupted.

If the U.S. were to pick up additional business because of problems in the Black Sea, it would most likely be Hard Red Winter (HRW) wheat. Even though those futures are now traded in Chicago, it is still considered “KC wheat.” (One-hundred and fifty years of history and proximity to the production areas have locked in a label that will never change.) This month Kansas City wheat futures broke 70 cents, rallied a dollar, and then broke another 70 cents as traders alternated between the certainty of military action and the certainty of a peaceful outcome.

Contributing to HRW’s volatility is the ongoing drought in the U.S. plains. Key areas of Kansas, Colorado, Texas, and Oklahoma have received less than one-third of their normal precipitation over the past five months. In combination with the political concerns, those weather concerns gave KC futures almost unprecedented volatility. Daily trading ranges averaged almost 3% of the value of the underlying commodity, and several days traded more than a 30 cent per bushel range.

All agricultural futures benefitted from the “inflation trade,” which gained greater popularity this month due to the 17% rally in crude oil and the 38% rally in natural gas. The general thought is that as interest rates and energy move, higher commodities will increase in value, and equities will struggle.

Going forward, we want to keep a close eye on the corn crops in South America. Corn has gotten cheap compared to soybeans, and at this point, it risks losing acres in the U.S. this spring. Also, corn is more dependent on the Black Sea than soybeans are, as Ukraine is the world’s fourth-largest exporter of corn. So, while corn was less volatile than wheat and soybeans in January, we do not expect that to remain the case.

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Photo by Melissa Askew via Unsplash