Commentary provided by Chad Burlet of Third Street AG Investments
Released: August 31st, 2021
In comparison to the three highly volatile months which preceded it, the price action in August was rather pedestrian. Corn, wheat and soybean futures all had monthly trading ranges below 12% and their net price changes for the month were 0 – 4%. Risks and uncertainties abound, but for the past month they have been offsetting.
Hurricane Ida struck the Mississippi River export elevators on Sunday causing damage to some and cutting power to many. There will be short term dislocations and both shippers and receivers will incur additional costs. However, it will have no lasting impact on the U.S. balance sheets. We’re fortunate that this happened at a time when the PNW is the preferred origin for most destinations, and the gulf is operating at a fraction of its total capacity.
The highs for all three markets came shortly after the August WASDE report when the USDA surprised many of us with their aggressive reduction of the Russian and Canadian wheat crops and the U.S. and Brazilian corn crops. Those four crops were cut by a combined 36.5 million metric tons (MMT) from the estimates of a month earlier.
Chicago wheat futures reacted strongly to that report, rallying more than 50 cents from their lows on the 12th to their highs on the 13th, but they quickly gave back all those gains. World wheat prices, however, have continued to rally. In the last week of July, Egypt bought wheat from Romania and Ukraine at $245/MT FOB. Yesterday, Egypt bought wheat from Romania and Ukraine at $308/MT FOB. That $63/MT rally in less than five weeks is the equivalent of $1.71/bushel. While U.S. SRW is now competitive on a FOB basis, extremely expensive ocean freight makes it difficult for us to compete beyond our immediate neighbors.
The wheat harvest in the U.S. is virtually complete, but corn harvest is just beginning. Both producers and consumers are trying to maximize this transition. There are isolated reports of processors paying as much as $2/bushel over December futures for spot deliveries while neighboring elevators bid farmers option price for November delivery. Yield reports have started to trickle in with most reporting good results.
Unlike wheat, the U.S. has become globally competitive in the export corn market. Estimates of the Brazilian corn crop still differ, but it is at least 15-20 MMT less than a year ago and domestic prices in Brazil are at record highs. That sent world buyers to Argentina who managed to load a two-month record 9.8 MMT in July – August despite record low water levels on the Parana River. Argentine prices have also rallied, making the U.S. price competitive to most destinations.
Like last year, China is the biggest variable in world corn trade. After buying 10.7 MMT of new crop corn from the U.S. in May they have been completely quiet. Our sense is that they are monitoring their domestic prices and their own crop before they commit to larger imports. Estimates of their imports are as low as 15 MMT and as high as 35 MMT. In the current environment that spread translates to $1/bushel difference in the price of corn.
As we look ahead to September we are focusing on weather for the U.S. harvest and weather for Brazilian planting. Soil moisture in Brazil has been depleted and it was the delay in the rainy season a year ago that set off the series of events that resulted in their safrinha corn crop being cut almost in half. Land clearing in Brazil has been very aggressive and acres for both corn and soybeans will be up 4-6%.
In the U.S. most yield estimates are close to NASS’s 174.6 and 50 bushels/acre, respectively, for corn and soybeans. Also, there is a growing consensus that final corn acres will be 900,000 above June acres. That is based on the Farm Service Administration’s numbers that were released shortly after the August WASDE. We’ll know a lot more when they release their update after the September 10th WASDE report.
One long term item we’re watching with particular interest is the spike in production costs, particularly for corn. Supply chain disruptions and increased demand have moved input costs to record levels. Ocean freight is at ten-year highs. The sharp rise in land values is threatening to pull those prices higher for those that don’t own their own land. This will put a higher floor under prices and will increase food costs for those who can least afford it. It’s worth noting that futures for this fall – December Corn and November Soybeans – were 2% and 4% lower, respectively, but the Fall 2022 contracts were both higher this month.
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