Commentary provided by Chad Burlet of Third Street AG Investments
As expected, the weather was the dominant feature this month. In the U.S., corn and soybeans were planted ahead of the average pace, which increases the chance for trendline or better yields. A late-month surge of planting in North Dakota looks to have held prevented planting acres down close to average. Estimates of European and Black Sea wheat production and Brazilian corn production have increased notably in the past 4-6 weeks.
European and Black Sea Wheat Production
In addition to the large wheat crops that will soon be harvested in Europe and the Black Sea, those areas have much larger than normal carryover stocks. The result has been an aggressive price war, with Russian prices dropping from $275/metric ton (MT) to $225/MT over the month. U.S. SRW prices have followed suit, losing almost 10% this month, with July futures moving to a discount to July corn futures.
U.S. Hard Red Winter (HRW) Wheat
One crop that received good weather very late in its growing season was U.S. HRW. In the first half of May, the USDA and a leading crop tour put the Kansas HRW crop at 191 and 178 million bushels (MB), respectively. The latter number would be the smallest crop for that state in 66 years. While rains arrived too late for much of the crop, some fields did benefit. Just as importantly, pastures and grasslands flourished, and farmers stopped cutting wheat for silage. The market also became aware that Ardent Mills had purchased more than 10 MB of Polish and German wheat to be shipped to Florida and New York. The result was a roller coaster of price action in Kansas City Wheat futures. After losing 40 cents in the first two days of the month, the market rallied $1.82/bushel and then broke $1.50/bushel. In the process, it traded to a record $2.75/bushel over Chicago SRW futures before retreating.
Corn Market Challenges
Corn prices are facing some significant headwinds. After selling China 4 MMT between March 14 – April 14, exporters had 1.1 MMT of those sales canceled between April 24 – May 17. Brazil’s safrinha crop has enjoyed excellent weather and will be a new record. Even with its reduced crop Argentina has joined Brazil in discounting U.S. prices in Asia for the summer months. The rains in the U.S. Plains have encouraged more sorghum acres, which will join SRW in competing with corn as a feed substitute.
In the soy complex, Brazil has firmly established itself as the top producer and exporter. Their impact on prices and trade flows has been clear. In late April, they were selling soybeans in the export market at a two-dollar discount to Chicago futures. That allowed crushers in Europe and Asia to source soybeans more cheaply than U.S. crushers could buy them from local farmers. Even Argentina and the U.S. are importing soybeans from Brazil.
Brazil’s record crop of 156-158 MMT was the primary reason the soy complex lost roughly 10% this month. Good U.S. planting weather also played a part. The third factor is China’s overt efforts to reduce its dependence on imported soybeans. They are providing farmers with support and incentives to produce more soybeans domestically. They are also instructing the animal feed industry to reduce the amount of soybean meal they use in their compound feeds. They’ve been helped in this effort by the availability of cheap feed wheat, which has a higher protein content than corn, thus reducing the need for high-protein soymeal. At last report, soymeal and corn inclusion rates were down 2% from a year ago.
Looking ahead, we expect a continuation of May’s volatility. The Black Sea Grain Initiative may be ending, and Ukraine’s EU neighbors are adopting protectionist policies that will slow their land-based exports. U.S. crops are off to a good start, but rains forecast for June 10 and beyond are desperately needed. If SRW futures can move to 20 cents under corn futures and/or $2.20 under HRW futures, we see that as very good ownership.