Commentary provided by Chad Burlet of Third Street AG Investments
The last business day of September always brings the USDA’s report of September 1st U.S. grain stocks, the end of the previous crop year. This report has often yielded surprises that force a change in the last fall’s crop size and create significant moves in the futures markets. Today’s report followed that pattern, with soybean stocks 13% larger than expected and corn stocks 9% smaller than expected. The government responded by lowering last fall’s corn production by 41 million bushels (MB) and raising soybean production by 30 MB. However, to tie out the corn balance sheet in the October WASDE, they’ll also need to increase old crop demand by over 100 MB as the stocks number was 148 MB below their September estimate.
What was unusual was that today’s other report, NASS’s Small Grains Summary, also created some fireworks. The wheat crop is by far the largest of all small grains, and by September, almost all the winter wheat, spring wheat, and durum have been harvested, making surprises very rare. However, today’s “All Wheat” production number was 128 MB, 7.2%, below the average of the analysts’ estimates and 133 MB below the USDA’s August estimate. That near record miss helped Chicago wheat futures trade as much as 50 cents, 5.6%, higher at one point today.
The smaller than expected U.S. crop wasn’t the only thing pushing wheat futures higher. The Black Sea Grain Corridor has been functioning very well, but its future is very much in doubt. Tensions in the Black Sea ramped up as Russian President Putin declared that four regions in eastern Ukraine are now part of Russia, and Ukraine formally submitted an application to become part of NATO.
The Black Sea isn’t the only region where reliable transportation is at a premium. U.S. railroads and their unions avoided a national strike with a tentative agreement on September 15th. However, the rank-and-file of a dozen different unions must vote to accept the package before it is considered approved. Three unions have voted in favor, with the other nine voting in the next month. However, several unions are displeased with the lack of work rule changes, so approval is not a certainty.
While those negotiations and votes were underway, the center of the U.S. was turning dry. While that was good for early harvest, it has been awful for the Mississippi River. Water levels have plummeted, forcing a reduction of both drafts and tow sizes. Levels have now fallen to the point where tows are running aground, and sections of the river are temporarily closed until dredges can clear a deeper channel. Current projections have the river falling to its second lowest level ever by late October.
Fortunately, or unfortunately, U.S. exports have not been very competitive, and some of the existing business has been switched from the gulf to the PNW. Export corn sales of 13 million metric tons (MMT) are only half what they were a year ago, and U.S. wheat prices are $40-$60/MT above world prices. While that has allowed U.S. exporters to cope until this point, only heavy rains in the Mississippi River watershed can provide a permanent solution.
Looking ahead, the Black Sea agreement and U.S. transportation difficulties will be the top risk items, followed very closely by South American weather. To this point, Brazil has been favorably wet, and Argentina has been frustratingly cold and dry. Early estimates for South America are for a soybean crop of 210 MMT and a corn crop of 188 MMT, 37 MMT, and 12 MMT above last year, respectively. If realized, world carryouts in those two crops will be comfortable or even slightly bearish.