Commentary provided by Chad Burlet of Third Street AG Investments
The last business day of June always brings the USDA’s release of its June 1 Grain Stocks Report and its Acreage Report. They arguably make it the most important report day of the year. This year’s reports certainly didn’t disappoint, but there were plenty of significant developments in the agricultural markets before last Friday.
Black Sea Region
The Black Sea remained an area of key interest as Russia continues to be the price setter for world wheat, and Ukraine passed Argentina to become the world’s number three corn exporter. Sadly, the Black Sea Grain Initiative (BSGI) will end in mid-July. At the same time, the EU has allowed five of Ukraine’s neighbors to ban imports. This is unfortunate, given that the Ukraine Farmers’ Union has just projected record yields for this year’s wheat crop. The country is aggressively expanding its export capacity on the Danube, but we fear farmers will receive very poor prices for this year’s crop. Russian wheat farmers are also seeing low bids. Bids to farmers for class four wheat, which competes with EU soft wheat, are roughly half of the country’s $235-$240/metric ton (MT) export price. Transportation costs have risen because of the war, the government continues to tax exports, and exporters are taking wider margins now that Western companies have been expelled. Only the very weak ruble has allowed farmers to come close to breaking even.
The other area of keen interest for world wheat is India. The U.S. and Indian governments have pegged the crop between 112.5-113.5 million MT (MMT), but the Indian flour millers say the crop is 10 MMT smaller. An export ban remains in place, and the government has released some of its reserves to tamp down prices. An unconfirmed rumor that India was considering imports gave the futures market a quick 3-4% rally. For the month, Chicago wheat futures were up 7% as international uncertainty and a small U.S. crop pushed traders to cover a near-record short position. Kansas City, where traders had a small long position, was only up 2%.
Grain Stocks Report
Friday’s Grain Stocks Report supported prices as corn, wheat, and soybean stocks all came below analysts’ estimates. The 149 million bushel (MB) gap between the corn stocks estimate, and the actual figure was the largest miss since 2010. Even with that 3.8 MMT corn stocks surprise, the Acreage Report pushed the stocks report off the front page.
Without question, the biggest surprise on Friday was the four million-acre reduction in soybean planting. The market was expecting an increase of 168 thousand acres. It was the second-largest miss ever for soybeans, and November futures immediately rallied 4%. November futures were +17.2%, and August futures were +18.4%. Even with those strong rallies in soybeans, board crush managed to post small gains as products more than kept pace.
On the product side, soybean oil did most of the heavy lifting, with August futures gaining an incredible 33% in June. That total was certainly enhanced by the fact that soybean oil ended the month of May at multi-year lows. It’s worth noting that those gains were achieved despite a mid-month curve ball from the EPA. The EPA released its Renewable Volume Obligations (RVO) for the next three years, and the totals were less than the market had expected. Soybean oil futures lost seven cents/pound (11.8%) between the morning of the 20th and the morning of the 22nd.
The soybean market faces a significant challenge with more than three months left in the U.S. growing season. Even if the projected record yield of 52 bushels per acre (BPA) is attained, the market must ration 100 MB of demand to secure a minimal carryout. We would argue that the rationing must come on the export side as crush has shown itself to be relatively price inelastic in the biodiesel/renewable diesel era. Another record crop in Brazil will be needed, and they just finished harvesting the previous one. If U.S. yields fall below 50, BPA prices will be explosive.
Going forward, we expect soybeans to continue to gain on corn and U.S. wheat prices to align better with world prices. U.S. wheat prices had reached a level where millers were importing European wheat at a large discount to domestic wheat. Given our record low export program, wheat imports from anywhere other than Canada are not needed. The U.S. should price ourselves to prevent further imports from the EU, but not so cheap that we reinvigorate our exports. With U.S. weather improving, Chinese weather will get more attention. Flooding in northern China has now been replaced by record heat. World wheat and corn prices will rally quickly if China asks for offers.