Tight supplies versus trade risk

Grain markets closed out the second week of October mixed as the complex dealt with some surprises in the monthly WASDE report, as well as ongoing trade risk out of the Black Sea. While wheat markets saw a sell-off on Friday, it did surge on Thursday off reports that Moscow had submitted a list of concerns about the “Grain Corridor” export deal to the United Nations, with a conclusion in it that they would not renew the deal in a few weeks when the current version is set to expire. Fundamentally, leveraging energy and food security issues in order to get some political or economic compromises is now the game that Russian President Putin is playing. In the meantime, the ripples are eternal, from European crop input manufacturing issues to the restarting of nonenvironmentally-friendly coal plants to the higher cost of supply chains (read: inflation). Suffice it to say, hardly a week goes by in the grain markets without some significant variable getting updated, or a new one coming to light. All this adds up to more volatility, and therefore, an opportunity for both quick rallies and selling.

In the USDA’s October WASDE, a lot of attention was given to U.S. corn and soybean yields, both lowered slightly from the September report, AND what the trade was expecting. The USDA revised American corn yields from 172.5 bu/ac in the September WASDE, to 171.9 bu/ac this month, which is also nearly 5 full bushels below last year’s 176.7 bu/ac average. That means a total American corn harvest of fewer than 13.9 billion bushels, 8% lower or nearly 1.2 billion bushels below last year’s haul of more than 15 billion bushels. For soybeans, average yields were felled by 0.7 bu/ac from September’s estimate to 49.8 bu/ac this month, or nearly 2 bushels below last year’s average of 51.7 bu/ac. This means a total American soybean harvest of 4.313 billion bushels, about 3% or 150M bushels below Harvest 2021’s output.

Historically speaking, when the USDA lowers American corn and soybean yields in their September and October WASDE reports, 60% of the time, we see another yield revision lower in the final January WASDE. As it stands today, U.S. corn stocks-to-use pace is sitting at 30 days worth of supply, while soybeans are around 16 days, the tightest stocks-to-use ratio for U.S. beans since 2013. Thus, even with some bearish revision on the demand side of things, the market clearly doesn’t have an abundant supply, so we’re still in a tight carryout situation. That said, with the lower yields shared last week, front-month corn futures pushed above $7 and soybeans contracts topped $14. While the market couldn’t hold those levels last week, the fact that the market didn’t fully retreat suggests a bit of a new price floor for these two crops until more about the Ukrainian war (read: Ukrainian corn exports) and the South American crop is known.

For wheat, the big update from the USDA was the lower adjustment of U.S. total wheat production – as originally indicated in their Small Grains report, published on September 30, 2022, and mentioned in this column in the subsequent week – and how that impacted demand. In the October WASDE, U.S. wheat exports were lowered by 1.45 MMT (or 50M bushels) to 21.1 MMT, which, if realized, would be the lowest export total for American wheat in 50 years since 1971/72! Looking forward, U.S. winter wheat acres planted this fall are expected to remain similar to last year, but the big risk again is in the U.S. Southern Plains where farmers from Kansas to Oklahoma are worried about their wheat even emerging. In Kansas alone, the entire state is in some level of drought, with at least a quarter of it in “exceptional drought”, the most extreme rating that can be given.

lsewhere on the wheat global balance sheet, thanks to another La Nina-induced dry season, Argentina’s harvest was lowered by 1.5 MMT, pushing their exports down by 1 MMT from last month’s forecasts, and aligning with the private market forecasts that I mentioned last week in this column. While Australia’s numbers didn’t change, recent and forecasted rains in eastern Australia will likely negatively impact the quality of cereal harvest (which, unfortunately, we know all about in Western Canada). IKON Commodities told Reuters that nearly half of New South Wales wheat crop – roughly 6 – 7 MMT – could be downgraded, which is significant as this region tends to compete for most with Canada’s higher protein wheat on international markets.

Finally, there continue to be discrepancies out of Russia as the USDA kept their production estimate at 91 MMT, versus the private and local government’s forecast of over 101 MMT. The extra 10 MMT is pretty significant as the top eight wheat exporters in the world, which includes Russia, are expected to have a collective 2022/23 carryout of 55.7 MMT, the lowest volume in a decade. Also worth noting that the U.S. will have the most inventory out of all the major wheat exporters, with their 15.7 MMT accounting for over 28% of the total. However, importers will likely source from cheaper options with the U.S. dollar at its highest level in over 20 years.

Overall, there are plenty of variables – both known and net-new – that are impacting grain markets. As we get closer to the renewal deadline of the Grain Corridor deal in mid-November, you might see more price risk get built into wheat prices. This would also be around the same time we’ll know more about the quality of wheat that eastern Australian farmers are taking off their paddocks. Therein, if you don’t know the quality of what’s in your bins, you have a few weeks to figure it out, as pulling the trigger into a rally may be required sooner than later.