Commentary provided by Chad Burlet of Third Street AG Investments
August was a bearish month for grain futures, with corn and wheat making their highs on August 2nd and lows on the 30th or 31st. Nearby corn and wheat futures traded to their lowest level since December 2020. Soybean futures, meanwhile, had almost the opposite experience, making their lows on the 8th and their highs on the 29th. The fundamental catalysts for those moves were the June 30th acreage report, where corn added acres and soybeans lost acres, and the August WASDE, where the soybean carryout was tight and the corn carryout was very comfortable. Corn was down 6% for the month, while soybeans were up 4%. Wheat futures were the hardest hit, closing 10-13% lower.
The soybean balance sheet was tight in August as planted acres fell by four million in the June acreage report. It tightened further in the August WASDE when NASS cut their yield estimate from 52 bushels/acre (bpa) to 50.9 bpa. Some unexpected export business has also supported us. While Brazil has remained a clear discount to the U.S., their long line-ups have pushed some Chinese crushers up to the U.S. for some fill-in cargoes. After struggling with poor margins for a while, the Chinese have been crushing at a record rate in July and August. The USDA increased their estimate of Chinese crush from 91 to 92 Million Metric Tons (MMT) this month, and they’ll need to add 1-1.5 MMT in the September WASDE.
Soybean crush margins in the U.S. have been excellent all year as we benefit from renewable fuels on the soyoil side and significantly reduced Argentine exports on the soymeal side. If reduced U.S. yields force us into a rationing situation, the reductions will need to come on the export side. It will be difficult to slow U.S. crush as more plants come online, and margins remain strong.
While U.S. soybeans lost four million acres in the June 30th Planting Intentions report, corn added 2.2 million harvested acres. That put the U.S. on track to build a burdensome carryout. Even when NASS cut their yield estimate by 2.4 bpa, our carryout remained above 2.2 billion bushels, a five-year high. Our biggest challenge has been Brazil’s record crop and increased export capacity. They have now passed the U.S. as the leading corn exporter. A year ago, the USDA’s estimate for U.S. 2022-2023 corn exports was 2.4 billion bushels. In the August WASDE, they were at 1.625 billion.
There are some encouraging signs regarding Chinese feed grain demand. They have been a strong buyer of Brazilian corn all summer, and, in addition, they’ve continued to buy a significant quantity of U.S. sorghum at prices well above corn prices. This month, they’ve also bought one MMT of Australian barley after settling a long-standing trade dispute.
The world wheat market continues to be plagued by politics, none more important than the Black Sea. Since withdrawing from the Black Sea Grain Initiative (BSGI) in mid-July, Russia has constantly targeted Ukrainian grain facilities in the Black Sea, along the Danube, and in the interior. Russia’s attempt to dictate a floor price for the wheat market is failing badly, and any increase in Ukrainian exports will further undermine their efforts. The Russian and Turkish Presidents are meeting next week, but very few expect any sort of breakthrough.
Even without the return of the BSGI, Ukraine appears capable of exporting the 30-32 MMT of corn and wheat that the world expects from them. The combination of the Danube facilities and the land-based Solidarity Lanes appears sufficient to hit that target. In addition, Ukraine has moved some non-grain vessels out through their self-designated Humanitarian Corridor, and they’re close to an agreement with vessel insurers on how to protect freight owners who enter the Black Sea financially.
In India, they’ve just logged what’s reported to be the driest August since 1901. This comes when they are fighting food inflation, and the current leadership is keenly focused on next spring’s election. To that end, they’ve maintained their wheat export ban, expanded their rice export ban, and set a minimum export price for the rice that is legal to export. Rice prices in Asia are at a 15-year high, which will push more business into wheat and corn.
Back in the U.S., the bear market in Chicago has been driven primarily by record yields in SRW. The exceptional yield of 74.9 bpa generated a crop that is more than 100 million bushels (30%) bigger than last year’s crop. This drove the cash basis lower and widened the calendar spreads. Spreads widened sufficiently to trigger an increase in the CME’s Variable Storage Rate (VSR) mechanism. Storage charges on delivery receipts were increased from five cents to eight cents/month. This helped push the September ’23 – July ’24 calendar spread out to an incredible 88 cents per bushel (CPB). Along the way, SRW became the cheapest wheat in the world on a FOB basis. It’s no surprise that China bought two cargoes last week.
Going forward, we have our eyes on many moving parts: the Black Sea, elections in Argentina, weather in India and Australia, and U.S. finishing weather. That last item is probably the most important for our prices. We’re heading into another 7-10 days of hot and mainly dry weather. It comes at a crucial time for soybeans and late-planted corn. If the forecasts are correct, we’ll lose some yield, and I expect prices to increase.