Commentary provided by Chad Burlet of Third Street AG Investments

From a commodity perspective, March came in like a lion and went out like a lion. At the beginning of the month, the market was trying to grasp the impact of the Russian invasion of Ukraine. At the end of the month, it was attempting to price a USDA Planting Intentions report that showed a larger than expected shift by U.S. farmers away from feed grains and toward oilseeds.

This month May Wheat futures had a record trading range of $4.31-¼, 46% of its February closing price. Despite that wild ride, it was corn, not wheat, that was the strongest performer in the agricultural sector. December Corn futures set new contract highs today when they briefly traded limit up at $6.91. For the month, they were 76-½ cents higher, +12.6%. May wheat futures were 33 cents, 3.4%, higher. Surprisingly, soybeans managed to settle about 1% lower for the month. Of our three primary commodities, they are the least impacted by Black Sea shipments and reduced Ukrainian acres.

As we mentioned, much of March was spent trying to analyze and price Russia’s invasion of Ukraine. Early this month, the CME increased the daily price limit on wheat to 85 cents/bushel. If contracts settled at those limits, the exchange would automatically move to expanded limits of $1.30/bushel/day. On several occasions, even those expanded limits were insufficient, and the market needed to find creative ways to trade futures outside of those limits. The two most widely used techniques were to trade deep-in-the-money calls with a delta close to 1.0 or to trade deferred futures months which had not locked limit and then do a calendar spread to establish a position in May futures. These were known as synthetic futures, and it gave rise to the phrase: May Wheat is trading “X” cents above/below limit ‘synthetically.’

While extremely useful, those trades were less precise and left open to interpretation of what the actual high and low prices were on any given day. It also obscured the size and velocity of some of the intra-day price moves. While weekly charts reflect a new all-time high for Chicago wheat of $13.40, we believe wheat traded briefly over $14 synthetically. The most violent trade period was during the final hour of the day session on March 8th, when wheat rallied two dollars (synthetically) in twenty minutes and then broke a dollar in three minutes. As we mentioned in our February market letter, we can point to historical periods longer than four years when wheat futures moved less than a dollar.

Fortunately, relative calm has returned to the wheat market, emphasizing the word “relative.” The world’s wheat exporting community responded in several helpful ways: Australia has been exporting at a record pace; India is looking to export 10 Million Metric Tons (MMT), nearly double their previous record; Argentina made shipments outside of Mercosur, and even Russia managed to ship 2 MMT this month. Many European and Eastern European countries also made incremental increases in their shipping plans. As is too often the case, U.S. wheat remained the most expensive wheat in the world, and our export projections are lower now than they were two months ago.

As we mentioned above, the March Planting Intentions report from the USDA showed a larger than expected shift by U.S. farmers away from feed grains and into oilseeds. A modest shift had been expected because feed grain crops tend to require more fertilizer, and fertilizer prices are at record highs. When smaller crops like sorghum and sunflowers are added, we ended with a 3.9 million acre increase in oilseed crops and a 4.7 million acre decrease in feed grain crops. The market reacted quickly, with corn futures rallying to limit up 35 cents higher and soybean futures breaking 50 cents/bushel. We moved the November Soybean:December Corn ratio below 2.08:1. We traded briefly at this level in 2019, but we need to look to the drought rally of 2012 to see any sustained trade at these levels. We expect the June acreage report to show some shift in acres in favor of feed grains, assuming normal planting weather.

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