Commentary provided by Chad Burlet of Third Street AG Investments
After months of high volatility and wide daily and weekly trading ranges, the agricultural markets settled down considerably in October. Corn and soybean futures were particularly docile, with corn volatility falling to a two-year low and soybean volatility to a one-year low. The monthly trading range in soybeans was the second narrowest for any month in the past two years, and for corn, it was the narrowest.
Unfortunately, record-setting prices and extreme uncertainty didn’t leave our markets entirely; they simply moved from the commodity side to the transportation side. Potential rail strikes and record low water levels on the Mississippi River have driven freight costs to record levels and created serious questions about the ability of our processors and exporters to operate efficiently.
The threat of a national railway strike was averted in September when negotiators for the railroads and the 12 unions representing the various rail workers reached a tentative agreement. To this point, eight unions have completed their voting on the agreement, with six unions voting “yes” and two, the Signalmen and the Maintenance Way Workers, voting “no.” The final four unions are voting now, but it’s clear some points of the agreement will need to be renegotiated. As a result, the risk of a strike now looms in December.
Large areas of the Great Plains were dry all summer, and the entire center of the country was dry from mid-August through mid-October. While that led to a speedy harvest, it was very detrimental to water levels on the Mississippi River. Levels in key locations, such as Memphis, Tennessee, were the lowest in recorded history. Drafts on barges were reduced to 9’6,” and tow sizes on the lower Mississippi were cut in half. Even with that, there were frequent closures as barges ran aground, and the Army Corp of Engineers hurried to dredge a deeper and wider channel. One such closure had more than 2000 barges waiting to transit north and southbound. This resulted in the highest freight rates in history, with several barges trading at 3000% of tariff, more than ten times the annual average. Ingram barge line had to declare force majeure on some of its contracts.
With barge movements cut in half, demand for railcars skyrocketed. The cost to get guaranteed placement of rail units rose to $3000/car, roughly 75 cents/bushel. That’s in addition to the published or negotiated rail rate. All of this has helped make U.S. export prices of corn and wheat very uncompetitive. Our corn export sales are less than half of a year ago, and wheat sales are the slowest in 40 years.
Domestically those that source grain from far away are suffering the same fate. The drought in the west and southwest already has Texas feedlots pulling corn from as far away as Illinois, causing delivered corn contracts to be priced at over $9/bushel. This has led to a cargo of corn being booked to move from Brazil into the Texas Gulf right in the middle of harvest.
Overseas the Black Sea remains the center of attention. The initial 120-day Grain Corridor agreement between Russia, Ukraine, Turkey, and the UN was working relatively well, with over nine million metric tons moving out of Ukraine in the first three months. Lately, however, Russia has slowed the vessel inspection process, which has created a backup of 175 vessels waiting to be inspected. The Ukraine Ag Ministry said their port facilities were only operating at 25-30% of capacity because of the vessel shortage.
This past Saturday, Russia said it was ending its participation in the agreement because Ukraine attacked its Black Sea fleet in Crimea. The situation remains very fluid, and the reports today are mixed. On the positive side, the three remaining parties said they are continuing with the agreement, and 16 vessels are transiting today, four inbound and 12 outbound. In addition, a UN spokeswoman said, “Russia has only temporarily suspended its participation.” On the negative side, London insurer Ascot has paused writing coverage for any new shipments, and several vessel owners have said they’ll no longer enter the Black Sea. So headline risk will be with us for the foreseeable future.