Commentary provided by Chad Burlet of Third Street AG Investments
Food security and domestic inflation have quickly become the top concerns of almost every country in the world. The loss of Ukrainian wheat exports caused several smaller countries to restrict their exports and encouraged several importing countries to increase their inventories. The loss of Ukrainian sunseed and sunoil exports has prompted Indonesia to halt its palm exports, which has caused an explosion in world vegoil prices. May soyoil futures traded at 91.4 cents/pound on Friday, the highest price in history and more than 20 cents/pound above the previous record in 2008.
As the world scrambles to produce more vegetable oil, processing margins have skyrocketed. May Board Crush traded over $2.60/bushel, and cash (physical) margins are a dollar/bushel better than that at most Midwest locations. Oil’s share of a processed soybean’s value is now over 50%, even though soybeans are only 20% oil. May soybean oil futures were up 27.5% for the month, and May soybean meal futures were down 5.8%.
The war is impacting currency values in Ukraine, inflation concerns, and the expectation of significantly higher interest rates. In addition, supply chain disruption and the massive covid lockdown in China are impacting both commodities and currencies. The dollar index had its highest monthly close since November 2002. Two key commodity currencies, the Chinese yuan and the Brazilian real were particularly weak in the last half of April. That provided a headwind for soybeans as prices became much more attractive for the world’s top exporter and much more expensive for the top importer.
There are important differences in the soybean balance sheets prepared by the U.S., Chinese, and Brazilian governments. The U.S. projects China’s imports at 91 million metric tons (MMT) while China has them at 102 MMT. The U.S. projects Brazilian exports at 82.75 MMT while Brazil has them at 77 MMT. If we accept China on China and Brazil on Brazil, that’s a 16.75 MMT swing from the USDA’s numbers. The U.S. would be expected to make up much of that difference, and our carryout is currently projected at only 7 MMT.
May corn futures had the highest monthly close ever for a front month futures contract like May soybean oil futures. Corn futures did trade higher than this for several days in 2012, but we’ve never ended a month this high. Corn is being driven by the loss of production and exports in Ukraine and weather concerns in the U.S. and Brazil. It has been unfavorably dry in central Brazil, where the safrinha crop is entering its key growing period. The U.S. concerns lie mainly in the plains where the north is unseasonably cold and wet, and the west and south have been arid.
Corn demand has also been supportive to prices this month, with almost 5 MMT of corn sales registered to China and the EPA approving year-round sales of E-15 gasoline, gasoline with 15% ethanol blended in. The initial sales registered to China were exporters moving their Ukraine programs to the U.S., but the latest registrations were new purchases by China. Their Dalian corn futures contract is at record highs.
May wheat futures in Chicago were only 3.8% higher in April as calendar spreads continue to correct from the extreme price spike in early March. For the month, the May-July calendar spread moved from a 33-cent inverse to a 12-cent carry. May futures are more than 3½ dollars below the synthetic highs we saw on the 3rd and 4th of March.
Notwithstanding, Chicago July futures ended the month 15.4% higher as the wheat market also has significant concerns. The cold and wet in the northern plains and southern Canada is threatening spring wheat planting, as is the flooding in the Red River Valley. Millions of bushels of HRW have been lost to the drought in the western plains, and millions more are at risk. A slightly improved forecast prompted a 3½% downward correction in Kansas City futures on Friday, and improved forecasts give hope of further corrections.
In a year when all the agricultural balance sheets have tightened, production concerns extend well beyond the U.S. and Ukraine. Good crops are needed throughout the northern hemisphere if we want to prevent further food inflation. India is an example of a country that has quickly popped onto everyone’s ‘watch list.’ That country has played a key role in covering the wheat exports lost in the Black Sea, increasing shipments by almost 6 MMT over last year. Unfortunately, temperatures in India have spiked to near-record levels and are forecast to remain far above average in May.
As we consider world production in the year ahead, we are pleased to note that catastrophic shortages of farm inputs have been avoided, but isolated shortages still exist. Reduced use of fertilizer does increase the risk of lower yields. In almost all cases, input prices are significantly higher. Fortunately, crop prices have rallied sufficiently to make production agriculture profitable almost everywhere. We should expect farmers to make every effort to plant and then invest in their crops as necessary. World balance sheets are very tight, and prices are exceptionally high. In this environment, even small changes will create big price moves for the better or worse.
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