Commentary provided by Chad Burlet of Third Street AG Investments
April had the largest one month rally of corn futures ever. Considering the 162 year history of corn futures, that is no small milestone. May Corn futures rallied $1.75¾ (31.1%) this month. In the process the front month soybean/corn ratio moved from 2.55 to 2.12 and May Corn futures moved to 42 cents over May Kansas City Wheat futures. Corn was driven by the dual engines of Chinese imports and a Brazilian drought.
Despite that record move, and a fifty cent rally in the May-July calendar spread, there was no evidence the futures market had outrun the cash market. Quite the contrary. The CIF barge market remained at full delivery values and domestic bids were well above historical averages. The only small sign that the corn market had started to solve the problem was Smithfield’s purchase of Argentine corn to be shipped into Wilmington, North Carolina.
Export sales are already close to 100% of the USDA estimate for the crop year and with shipments maintaining a strong pace there will be pressure to increase that estimate in the May WASDE. Ethanol margins have also remained positive. Ethanol prices have rallied sharply, helped by increased driving, and RIN’s are near all-time highs. Weekly corn grind is on a trajectory to meet the USDA’s estimate and ethanol stocks are at a five month low.
With the old crop carryout in the U.S. continuing to tighten, the safrinha corn crop in Brazil has taken on increased importance. Unfortunately, their weather has not cooperated. The crop was planted two weeks late and rainfall, particularly in Parana, has been well below normal. On the 8th and 9th of April the U.S. and Brazilian governments estimated total Brazilian corn production would be 109 million metric tons (MMT). In three short weeks the market consensus on that crop has dropped by a very sizable 10 MMT. Most of that drop will come directly out of their export availability. With Argentina exporting to both the U.S. and Brazil, the world will look to the U.S. to make up for the Brazilian shortfall. That shortage will be most acutely felt in the fourth quarter of this calendar year.
Given that backdrop there is zero tolerance for even the slightest production problem in the U.S. Several dry pockets are getting significantly more attention than they normally would on the first of May. The world wheat situation is not nearly as precarious as the corn situation and wheat can and will help solve a portion of the corn problem. Led by China and other Asian countries the world is on pace to feed 165 MMT of wheat this crop year, a record by 16 MMT. However, the forward price curves of these two grains do present a problem. In most of the world, including the U.S., the corn market is steeply inverted and the wheat market is in a carry. In a world where we must feed a significant quantity of wheat for 6-7 months it is only economic to do so for half of that time.
Going forward we see excellent trading opportunities in the price relationships between wheat and corn and also between corn and soybeans. As we head into the final six weeks of the spring planting season in the U.S. those two row crops are engaged in a fierce battle for acres. They must increase the total number of acres that get planted and neither can afford to yield any market share to the other.
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