Commentary provided by Chad Burlet of Third Street AG Investments
A handful of key inputs combined make February a bearish month for agricultural futures. Corn, wheat, soybeans, soybean meal, and soybean oil all closed lower for the month. After making their highs mid-month, all the nearby contracts made their lows today, the last day of the month. The three wheat markets took the hardest hit, closing 5.2-8.4% lower. Soymeal fared the best, with the May contract only fractionally lower.
The first bearish factor was the Black Sea, where “all country” shipments were close to a record for January and February. In addition, China released a Peace Plan, which included a strong endorsement for continuing to keep the Grain Corridor open.
The second bearish factor was the weather. Except for Argentina and possibly India, world weather has generally been good. As a result, most northern hemisphere winter crops are coming out of dormancy in decent shape. In the U.S., the southern plains are still dry, but most other agricultural areas have a better moisture profile now than they did four months ago.
The third bearish factor is that U.S. corn exports are lagging badly. Brazil’s export program has exceeded expectations, and Ukraine has continued to prioritize corn exports over wheat. Seasonally U.S. exports should have ramped up a month ago, but that hasn’t happened. The export inspections for this past week were the third lowest for that week in the past 40 years.
The fourth bearish factor is China. Not only are they buying all their corn from Brazil, but their much-heralded return from covid has produced few tangible results on the agricultural side. Also, U.S.-China relations continue to worsen. The balloon incident and China’s more open support of Russia have U.S. politicians openly talking about decoupling.
The fifth bearish factor was last week’s Ag Outlook Forum in Washington, D.C., where the USDA gave us our first look at their 2023-24 balance sheets and price projections. Their combined total wheat, corn, and soybean acres were 228 million, 6.2 million above this year. However, all three crops showed increased carryout, and price projections were well below this year’s prices: wheat down $0.50, corn down $1.10, and soybeans down $1.40. None of the USDA’s numbers were shocking, but they certainly helped set a bearish tone. In addition, U.S. crop insurance prices have been set at levels that guarantee profitability for almost everyone.
From where we sit today, it appears the last half of February price break can carry over into early March, but from there, we see price risk as clearly skewed to the upside:
- The current Black Sea agreement expires on March 18th, and extension talks haven’t started;
- The crops in Argentina continue to get smaller, and the government’s “green peso” program is encouraging farmers to hoard more than ever;
- India’s weather is turning hot, and the USDA Ag Attache thinks their crop is only 100 million metric tons (MMT) vs. the Indian government’s estimate of 112.2 MMT;
- U.S. ethanol margins are at four-month highs, and soy processors, who are adding capacity, continue to make $2-$3/bushel;
- As always, the market must carry a reasonable risk premium reflecting the challenge of planting, growing, and harvesting near-record crops.
Photo by Liz Joseph on Unsplash