Commentary provided by Chad Burlet of Third Street AG Investments
The themes of uncertainty and volatility that have been with us for most of 2022 did not leave us during July. Some root causes, like the war in Ukraine, have been with us for many months, but new risks and unexpected developments have impacted the agricultural markets this month.
The weather in the U.S. and Europe is at the top of the “new risks” list. These key production areas got off to relatively good starts this spring, with most acres getting planted and crop ratings close to historical averages. However, temperatures rose as we moved into July, and rainfall became scarce. We end the month with crops on a knife’s edge. Forecasts are concerning, and a slight change in either direction will significantly impact final yields. The next few weeks are crucial with corn finishing pollination and beginning kernel fill and soybeans setting and filling pods. As a result, analysts have started to lower their yield estimates in the U.S. and Europe.
One of the “new developments” was an agreement between Ukraine, Russia, Turkey, and the U.N. to resume vessel exports out of Ukraine. The parties had been talking for more than a month, but few thought there was much chance for an agreement. It remains to be seen how effective the agreement will be and whether Russia will continue to honor it, but cautious optimism has returned.
It will be important to monitor Black Sea shipments out of not only Ukraine but also Russia. August through November are historically the biggest export months for both countries. Russian grain exports have been explicitly exempted from Western sanctions, but they have still found their shipments constrained. They have found it very difficult to secure vessels, insurance, and financing. Companies in all three industries have been extremely reluctant to operate in a war zone and fear inadvertently violating sanctions. This agreement’s clear quid pro quo is that Western governments will do everything possible to facilitate Russian exports. In fact, the first week of the agreement already saw Russian complaints that the West wasn’t doing enough to help them. The eyes of the world will be closely focused on daily shipments out of both countries.
The other unexpected “new development” was the budget agreement between Senators Schumer and Manchin. That agreement broke a months-long stalemate and should allow the Democrats to pass a spending plan that includes many of their top priorities. Included in the agreement are a number of renewable fuel subsidies and blenders’ credits. The subsidies are funded for several more years, and then the legislation sets up a transition to a tax credit system similar to the one in California. Soybean oil was seen as a primary beneficiary, and December futures rallied from 55 ½ cents/pound on the 22nd to 65 ½ cents/pound on Friday. Board crush was understandably strong, with September moving from $1.62 to $2.17/bushel over the course of the month. Cash margins are even higher than board margins, penciling in $3-$4/bushel in most areas.
With December Corn futures closing unchanged for the month and November Soybean futures closing only a dime higher, one could be forgiven for thinking it was a relatively calm month. Nothing could be further from the truth. Both markets experienced a rapid series of alternating rallies and breaks. Corn had six moves of 8-15%. Soybeans traded at $12.88 on the 22nd and $14.89 on the 29th. Understandably, open interest is well below a year ago, and that liquidity is a challenge for traders and hedgers alike.
Looking ahead to August, we expect this volatility and uncertainty to continue. Meteorologists, and their customers, will scrutinize every detail in each new run of their maps. Yields from southern harvests and northern crop tours will be re-tweeted with reckless abandon. Vessel names and tonnages in the Black Sea will be reported daily. The war and weather have set us up for a very exciting couple of months.
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