Commentary provided by Chad Burlet of Third Street AG Investments
The last business day of September always brings us the USDA’s Grain Stocks and Small Grains reports. Traditionally, in these reports, most of the big surprises have been in the corn or soybean stocks, where an unexpected number can trigger a corresponding change in their estimate of last fall’s production. Wheat took center stage today, with stocks and production coming in well above analyst’s estimates. December wheat futures in Chicago, Minneapolis, and Kansas City made new contract lows today. They also greatly expanded their monthly trading ranges, with Minneapolis increasing from 46 to 82 cents and Chicago increasing from 45 to 75.
Soybean Stocks and Corn Performance
As of September 1, the end of the 2022-2023 crop year, Soybean stocks were reported at 268 million bushels (MB), which was 18 MB more than they estimated in the September WASDE. Despite that increase, they decreased last fall’s production by six MB. Despite those somewhat offsetting numbers, soybean futures were pulled lower by wheat and made new monthly and quarterly lows in the last two hours of trade.
Corn was the one market that stayed within its very narrow monthly trading range today. Corn futures were supported by a stocks number that was 91 MB below the September WASDE and by a 15 MB reduction in last fall’s production. December futures settled 1½ cents lower for the month after holding within an exceptionally narrow 22½ cent range for the entire month. Corn was supported by crop insurance, which provides excellent price protection for farmers at these levels and thus reduces hedging pressure. Offsetting that, and effectively capping prices, was increased export competition from Brazil, Argentina, and Ukraine.
Ukraine’s Agricultural Resilience
Ukraine has remained an area of significant focus even as the war drags on. Ukraine’s farmers produced larger-than-expected crops thanks to international support and favorable weather. Since dropping out of the BSGI, Russia has continually targeted Ukraine’s export facilities, but they remain operational. The Humanitarian Corridor, designated by Ukraine, has now been used to bring in empty bulk carriers and to send them outbound loaded with wheat. They’ve also worked with freight brokers and underwriters to create an insurance mechanism to provide financial protection for vessels loading at Ukraine’s Black Sea ports. Following that success, there were reports that they had made a large corn sale to China.
Ethanol Back in Focus
After what seemed like several quiet years, ethanol has re-entered the headlines. Internationally, it received strong endorsements from Brazil’s President Lula and India’s Prime Minister Modi. Domestically, the picture is more mixed. EPA’s Science Advisory Board (SAB) said there is “a reasonable chance there are minimal or no climate benefits from substituting corn ethanol for gasoline or diesel.” That is a tremendously important and controversial position. What’s at stake is ethanol’s role, if any, in Sustainable Aviation Fuel (SAF). SAF is the next big opportunity in renewable fuels, and ethanol would be ineligible for subsidies or tax credits if the EPA adopts the SAB’s position. Lobbyists, politicians, and scientists are all rolling up their sleeves.
Mississippi River’s Impact
The other big concern in the U.S. is the Mississippi River. With the Mississippi River back down to the levels we saw a year ago, barge freight is 2-4 times its normal cost. That’s reducing the prices farmers receive, and it’s making our exports less competitive at a crucial time of year.
Future Watch: Southern Hemisphere Weather
Going forward, we’ll be watching southern hemisphere weather with keen interest. In particular, we’ll be watching the dry areas of Australia and Argentina. Despite today’s break in Chicago, the world wheat market is historically tight. Another 5-10% lost in either of those countries would point us at much higher prices.