Commentary provided by Chad Burlet of Third Street AG Investments
We opened the month of August with all eyes on the M/V Razoni, the first vessel to sail out of Ukraine since the Russian invasion in February. The Razoni and at least 64 other vessels traveled safely through the corridors the UN, Turkey, Russia, and Ukraine agreed to. The agreement has exceeded expectations, with nearly 1.5 million metric tons (MMT) shipped this month. Freight and insurance costs have come down over the past four weeks. The original agreement was for 120 days, and we’re hopeful that it will be extended. It’s noteworthy that Ukraine is offering grain for December and January shipment.
Russia clearly benefits from the smooth flow of freight and grain within the Black Sea and the greater availability of insurance and financing. Most assume that is why they signed the agreement. Their wheat crop is a record, possibly as big as 97 MMT, and the country and its farmers desperately need the revenue from that crop. Despite all those positives, the continuation of the agreement is far from certain. Russia complains that the west has not done enough to facilitate its exports, and yesterday they bombed grain facilities in the Ukrainian port of Mykolaiv.
With Russia and Europe both offering wheat competitively, Ukraine has prioritized corn shipments, with that crop accounting for 62% of their August tonnage. Historic droughts in Europe and China have increased their corn needs. The European crop is 15 MMT smaller than last year, and their imports are expected to increase from 16 to 22 MMT.
The U.S. corn crop has also taken a hit. In early August, crop conditions started to fall, and on the 12th, the USDA reduced their yield estimate from 177 to 175.4 bushels per acre (BPA). Reports from farmers and crop scouts were consistently disappointing relative to early expectations. Last week, Pro Farmer had their Crop Tour, the country’s largest and most closely followed tour. General expectations were that yields would be several bushels per acre below the USDA, but they stunned the market with a 168.1 BPA estimate, a record drop relative to the August WASDE, and a full 600 million bushels of production below the government.
While Pro Farmer’s corn estimate was a record reduction compared to the August WASDE, their soybean estimate was almost identical to the WASDE, coming in just four million bushels above the USDA. That consensus on crop size has allowed macroeconomic developments to play a key role in the soybean market. China has continued its series of large stringent lockdowns in response to any spike in covid cases.
That has slowed their economic growth and sharply reduced their consumption of edible oils and fats. In addition, the severe drought in southern China has forced energy rationing, and several soybean processing plants are running at reduced rates. China’s crush rate for the crop year is 5-6% behind last year. Their currency is also at a two-year low, making imported soybeans more expensive and keeping pressure on processing margins.
In South America, Argentina is battling its difficulties. Their inflation rate is above 70%, a 20-year high, and farmers refuse to sell because that converts their dollar-based soybeans into pesos. The country desperately needs hard currency, and new Finance Minister Sergio Massa has been meeting with farmers and exporters, but no solution has been found.
With a shortage of available soybeans, Argentine crushers have been forced to slow down. Their crush rate in July and August was a five-year low. Brazil and the U.S. have been the beneficiaries of increased soymeal exports and near record margins and crush rates. September board crush traded near $3/bushel in late August, and cash margins were similarly priced.
With Brazil crushing at a record rate, their soybean export price rose quickly. The U.S. unexpectedly became competitive for September and early October exports. As the exporters aggressively tried to rebuild their pipelines, they found themselves in a bidding war with the crushers. With crop year ending stocks at a minimum, sharp inverses were created in both cash and futures markets. At the end of last week, an exporter paid $4 over November futures for a near port barge, and Midwest crushers were paying $2 over November futures for trucks that would be delivered within ten days. The September-November futures spread reacted accordingly, trading to a near-record $1.61/bushel inverse.
As we look ahead, several items have our attention: the pace of exports out of the Black Sea, crop finishing weather in the U.S., the pace of Chinese buying, and planting conditions in Brazil. Expectations are that Brazilian hectares will be up 4% and that they will produce a 150 MMT soybean crop. That’s equal to 5.5 billion bushels, a full billion bushels bigger than the record U.S. crop we hope to harvest over the next three months. Current conditions in Brazil are fine, but the long-term forecast looks a bit warm and dry. Our markets will remain exciting and volatile.
–Data and information is provided for informational purposes only and is not intended for trading purposes. Neither Third Street Ag Investments LLC nor any of their data or information providers shall be liable for any errors or delays in the data or information or any actions taken in reliance thereon. We do not guarantee any financial data or information’s accuracy, timeliness, reliability, or completeness.
–The risk of loss in trading commodity interests can be substantial. Therefore, you should carefully consider whether such trading is suitable for you regarding your financial condition. Past performance is not necessarily indicative of future results.
Image created via Midjourney