Jon Scheve with weekly market commentary made on April, 15, 2022
For the week:
July corn was up over 20 cents
December corn was up nearly 20 cents
November beans were up 6 cents
July wheat was up more than 45 cents
It has been 50 days since the start of the war in Ukraine and during that time:
July corn is up over a $1 per bushel
December corn is up nearly $1.25 per bushel
November soybeans are up only 14 cents
July wheat is up more than $2.25 per bushel
While beans were already up due to dry conditions in Brazil, concern over Ukraine’s loss of export capacity has shaken the corn and wheat markets causing prices to rally more than 20% in less than 2 months. Reasons To Continue Being Bullish: Ukraine Ukraine will likely not get 25% to maybe as much as 40% of their corn crop planted this year. More importantly, 500 million corn bushels (nearly 50% of yearly production) remain trapped in storage there from last harvest due to an export blockade by the Russian navy in the Black Sea. There has been some hope that Ukraine could export grain to western Europe by rail, but it is logistically difficult. Normally only 2% of Ukraine’s total exports are moved to western countries by rail because the rail track gauge (width) in Ukraine and western Europe don’t match. This means when shipping west each Ukrainian railcar must be transloaded to other countries’ railcars, and this process currently takes 30 minutes per car. While there have been efforts to ramp up the volume of cars being moved and transloaded, it’s unlikely Ukraine could exceed 30% of their total exports this way. In the past month they have only been able to move between 5 and 10 million bushels this way. Plus, moving grain by rail would also double the cost and time it takes to move grain compared to export facilities on the Black Sea. The city of Odessa and nearby ports are important Ukrainian grain export hubs, even more significant than how New Orleans is for US grain exports. This means whichever country controls Odessa will control Ukrainian grain exports. And if facilities there are damaged or destroyed, it could take years before the region is a reliable global source of corn and wheat again. In the end, it may not matter if Ukrainian farmers get their crops planted if they do not have anywhere to move it. US Export Pace With uncertainty around if or when Ukraine grain will be shipped, demand is being rationed with higher values. Therefore, right now the market is watching US export pace carefully. If export pace continues to increase to levels like last year, then US carryout will be as tight as last year. This tightness would then carry over to the next year’s crop as well unless there are more than an additional 1 million corn acres added to the mix by June and we have normal weather conditions this summer. La Nina Concern La Nina conditions increase the chance of dry weather in the US’s southwestern corn belt, and right now there is a 60% chance La Nina conditions will last through the summer. Any chance of a dip in trendline yields will cause prices to rally further unless a lot more corn acres are planted. However, conversations I have had with seed dealers this week suggest there have been few if any changes to farmers’ planting intentions. E15 It was announced this week that E15 would be permitted year-round. However, only 2% of all US gas stations carry it currently. Early estimates suggest this will only lead to 25 million more corn bushels added to the ethanol grind unless more fuel stations are willing to carry it and consumers are willing to buy it. Wheat Hard red winter wheat growing conditions are the second lowest in 30 years and 20% below normal for this time of year, particularly in the southern plains. Since wheat in the southern plains competes with corn in feed rations, despite the area not being a major corn growing area, it could help corn values moving forward some. Reasons To Be Bearish: Gas Prices While expansion of the E15 is good, higher fuel prices could affect overall fuel demand as consumers may drive less. High Feed Prices Animal feeders in general will continue to face issues with profit margins if prices continue to rally. Additionally, the spread of bird flu has been sizeable and will likely mean 25 million fewer corn bushels will be fed nationally this year. China China has continued to keep covid restrictions in place, which has led to less factory output. These lockdowns could mean less productivity and less money in their economy. It could also mean less food demand moving forward. There have also been profitability concerns in China’s hog sector and soy crushing industry. This could mean a demand pull back for corn and beans. Milo Milo’s basis values in the US are lower than a year ago. From a nutritional value perspective, milo should trade at a discount to corn in the US. However, US milo basis values seem to be down because demand from China is lower than in the past. Traditionally, Chinese buyers purchase milo because they can get around import taxes in China. This helps to keep milo trading at a premium to corn in this country. This drop-in basis may be an indication of larger issues in China that could spill over into other feed commodities. India India has not been a wheat exporter in nearly 8 years. However, last year they produced a record crop. With their inventories so large, and wheat prices so high, they are looking to be an export player on the world stage this summer. This may put a dent in wheat prices, which could lead to some downward pressure on corn over time. Brazil Depending on the weather over the next four weeks, Brazil’s second corn crop could still be large. This may be an opportunity for buyers of Ukrainian corn to replace their trapped purchases due to the war. Futures Values Futures values are incentivizing US farmers to plant more corn despite higher fertilizer prices. If a few farmers change their planting intentions this spring prices could pull back later this summer. Bottomline: The world is used to having 4 large corn producers, the US, Brazil, Argentina, and Ukraine, to buy from. Having one major player possibly unavailable indefinitely, places risk on the rest of the world’s buyers. Plus, the increased risk potential of La Nina impacting US yields this summer could mean more upside potential than downside risk.
Jon Scheve Superior Feed Ingredients, LLC
9358 Oak Ave Waconia, MN 55387 jon@superiorfeed.com