The warning was there. Now what?
The world is now watching. We have their attention. Tight global fuel supplies exasperated by the war in Ukraine, rising food prices, and inflation. We tried to warn. I spent my entire winter giving speeches across the Midwest. I harped that there were historic nine grain and oilseed commodities that had tight ending stocks within the United States. I warned the world needed South America and the United States to have a perfect growing season in 2022 or high prices would hit grain markets. The unthinkable has happened and continues to agonize the global community.
For the short term, supplies of grain are tight, and likely will be tight until spring 2023, (assuming South America has a perfect growing season during January through March 2023). If Brazil and Argentina do not have a perfect growing season next year, grain prices will likely then stay firm until the fall of 2023 (assuming the United States has a bumper crop next summer).
To fix the reduction of supply, we are already seeing countries encourage farmers to double crop or allow early release of acres from conservation programs. Eventually, grain production globally will increase, Mother Nature will cooperate, there will be a surplus of ending stocks, and the result will be a washout of prices. But for now, there is not a quick fix for the global food struggle, and the grain price outlook for the remainder of 2022 looks firm.
Currently, we do not have a reason for grain prices to take out recent contract highs, yet we also do not have a reason for prices to fall out of bed, and drop lower, either. A sideways price pattern seems likely to emerge for the coming weeks for grains, as we wait for Mother Nature to do her thing. In the meantime, let’s take a look at the current fundamentals for soybeans, wheat, and corn to understand what potentially lies ahead.
U.S. soybean ending stocks for the 2021/22 crop year are at a snug 235 million bushels, thanks to strong demand. Last year's crop was planted on 87.2 million acres, while the crop getting planted right now for the 2022/23 year is pegged for 91 million acres. Even with that dramatic increase in acres, and assuming near record yield of 51.5 bushels per acres, ending stocks only slightly notch higher to 310 million bushels next year thanks to increased demand for both exports and domestic crush.
This year’s soybean crop is late getting planted. Minnesota and North Dakota are well behind normal pace due to heavy rains this spring. It is important to note that, combined, both states account for 15 million planted acres of soybeans, or 16% of total planted acres. Most importantly, this is the soybean crop that goes by rail to the Pacific Northwest (PNW) and for export to Asia. According to the North Dakota Soybean Council, 71% of North Dakota soybeans are exported globally via the PNW.
Regardless, this planting delay does two things; lessens the ability of the U.S. to have a record crop, or even reach the current USDA yield projections of 51.5 for soybeans. It also obviously reduces the ability for an early harvest, which will then create a need to stretch the last of the old crop currently in bins and delay critical shipments of exports to nations in need come fall.
Wheat futures prices have been trading near lofty levels this spring due to a combination of low U.S. supplies and low global supplies, exasperated by the war in Ukraine. July 2022 Chicago wheat futures reached near the $12.75 price level, while July 2022 Kansas wheat futures recently traded above $13.50. July 2022 Minneapolis wheat futures reached the $14.00 price point as supply threats continue to keep prices supported for the short term. Will these towering prices continue in the months ahead? Much of that answer depends on Mother Nature. But for now, supplies are tight here in the United States and around the world. Looking specifically at the United States, current 2022/23 carryout levels for “all wheat” are at a low 619 million bushels, down from 1.028 billion bushels just two years ago. Winter wheat ending stocks are pegged at a low 361 million bushels. Ending stocks for spring wheat are pegged at 112 million bushels. Soft red winter wheat ending stocks for the 2021/22 season are placed at a very low 107 million bushels.
From a global perspective, projected 2022/23 world ending stocks of wheat are down to 267.0 mmt (million metric tons), down from 296.83 mmt just two years prior. Overall, global ending stocks are at the lowest level in six years.
Current global wheat production is forecast at 774.8 million tons, 4.5 million lower than in 2021/22. Over the coming months, traders will scrutinize weather around the world to gauge if any further production issues might decline the size of the global crop, which would only add to global food woes and likely increase prices further.
Here are the global wheat-producing nations to be watching this summer for potential weather issues, in order of expected production for the 2022/23 crop year:
- The European Union (primarily France and Germany) is the largest producing region of the world coming in at 136.5 mmt
- Next is China at 135 mmt
- India at 108.5 mmt
- Russia at 80 mmt
- Finally the United States at 47.05 mmt.
Other important countries to monitor include Ukraine, where production is forecast at 21.5 million tons in 2022/23, 11.5 million lower than 2021/22 due to the ongoing war. Canada’s production is forecast to rebound to 33.0 million tons in 2022/23, up significantly from last year’s drought-affected crop.
Corn ending stocks for the 2021/22 crop year are pegged at 1.44 billion bushels. With planted acres for the 2022/23 season at 89.5, and yield already adjusted to a lower 177 bpa, ending stocks are projected to be down to 1.36 billion bushels for the coming crop year.
Global demand is strong, the market is still jittery about grain production in Ukraine, and China continues to show its need to secure corn by now allowing genetically modified corn from Brazil to be imported. There is not a clear-cut time frame as to when the imports will begin, however; some feel that it will likely begin mid to late August, when the Safrinha (second crop of Brazil's corn) will be mostly harvested, and when the U.S. corn harvest has not yet begun.
Keep in mind that China has purchased a hefty amount of U.S. corn for 2022 and 2023. I view this Brazil/China deal as China finding a different source of corn to make up for what they would normally purchase from Ukraine. China does not want to “put all their eggs in one basket” and rely solely on the United States.
According to the USDA, in the 2020/21 crop year, China imported 29.51 mmt of corn; approximately half was from the U.S. and half from Ukraine. For the 2021/22 crop year, China corn imports were pegged at 23 mmt with the United States accounting for over half. For the 2022/23 crop year, Chinese corn imports are projected at 18 mmt. And again, China has already purchased U.S. corn for the 2022/23 crop year.
With the Ukraine situation still tense, to me it seems logical that China is opening additional trade doors to secure food. It also says China is well aware the Ukraine situation will not be resolved quickly, with lower production and potential issues of receiving grain due to the logistical nightmare Russia has created.
I believe China knows of the slow planting pace in the United States, with odds of a record crop likely out of reach. China is aware of overall lower global corn production for the 2022/23 crop year and is doing what it needs to do to feed people.
China is expected to grow 271 mmt of corn for the 2022/23 crop year, and their domestic use is pegged at 295mmt. The United States is expected to grow 367.3 mmt of corn for 2022/23, down from 383.94 mmt for the 2021/22 crop year. The United States grows one third of the world’s corn. China produces one quarter of the world’s corn. In fact, most of the world’s corn is grown in the Northern Hemisphere, so weather this summer is a large factor to be considered.
With global demand strong for grains, and with nearly all grain and oilseed commodities suffering tight ending stocks, all at the same time, this is a historic situation for the world. In the short term, prices fundamentally might struggle to rally substantially higher unless weather becomes an issue this summer, yet prices fundamentally may not fall out of bed because of the tight supply issue.
For now, it seems that soybean, wheat and corn futures have found firm footing, and a sideways trade pattern could be unfolding. Cash basis remains firm, reflective of demand, as traders now begin a stare-down between chart technicals, global politics, seasonals, Mother Nature, and true market fundamentals.
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