Grain markets finished the week lower but within a long standing range in corn and wheat while soybeans broke lower on Monday but moved sideways after that. Weather as a whole remained crop positive for corn and soybeans with the bulk of the Midwest seeing moderate heat and accompanying moisture. The heat was widely viewed as little more than an opportunity to push the crop a long, and in fact, in a few spots to the far south we did see corn harvest begin. Its not to say everyone was perfect: eastern areas of Nebraska and Western areas of Iowa saw heavy rains (isolated totals of 5-9”) but the damage appears more localized and other areas that didn’t flood received some much needed moisture. That same front that provided the moisture blocked heat from moving north, so North Dakota, South Dakota and parts of Minnesota remained very cool. That’s not ideal for corn and soybeans that are behind, but many areas also received moisture. Crop Conditions were strong on Monday and are expected to be steady to slightly higher again this week. For comparison, corns improvement by 1% was impressive due to the late season, but also put conditions on a very comparative level with the record crop of 2004. Soybean conditions deteriorated by 1% but rains on Sunday alleviated any trade concern.
On that same note, what was neutral to good for corn and soybeans was detrimental for spring wheat harvest, which continues to lag behind normal. Field conditions are deteriorating as well with wheat starting to lay over and some serious vomitoxin issues being reported in various locations. However these are quality issues that, due to the overwhelming world supplies, will have a much larger effect on cash markets than they will on futures.
Soybean prices tripped lower Monday as rains fell over the most threatened areas of the cornbelt. Now threatened is a relative term as conditions weren’t horrible, but there were noticeable dry areas developing in the eastern areas of Nebraska and northwestern Iowa. The rains effectively eliminated the only threat in a major production area, and the trade acted accordingly despite the small decline in crop conditions. Otherwise, the outlook for soybean growth in the next 10 days in particular, but even the next 15 days looks nearly ideal. Frost would appear the only major impediment to a huge crop this year, and the chances of that look slim right now.
It’s a bit of beating a dead horse, but soybeans still, despite heavy losses of the past six weeks, remain very overpriced compared to other grains. In fact, a study by Futures Farmer earlier this week indicated that if U.S. farmers were forced to decide now on what they would plant next year, they would still increase soybean acres by around 3%. Now that’s down from the ridiculous 10%-11% increase we saw this year, but its still a significant change in trend over the past five years or so. It also doesn’t include the effect that current prices are having on South American production plans, although AgroConsult released projections this week that Brazil too, is looking at a very similar situation losing corn acres to soybeans and cotton. None of this suggests that producers will be profitable, simply that price ratios are skewed enough at this point to continue worsening a carryout problem that’s already in place.
One note of interest is the relative strength of soybean meal that is undoubtedly providing at least partial support to this situation. Below is a chart of corn prices compared to soybean meal prices over the past year or so :
Similar trends are observed when comparing soybean meal prices to soybeans. Price ratios are at or near the highs of the past 10 years. We don’t suggest this will change in the near future, but it does explain some of the market function. Chinese demand for protein is a strong underlying reason for this, along with the fact that some major meal producers like India are not shipping right now. We would suggest, however, that this a function to watch and any weakening in this relationship would quickly speed up price declines in the related soybean contract.
Corn and soybeans are in a similar situation regarding the fact that yields are at or near record levels and appear to be improving. The weather this week reinforced those ideas with corn conditions improving by 1% despite the late date and the very limited harvest in the far south reflecting yields that are as strong if not a bit stronger than what was expected. There is one major difference however; price declines in corn began much sooner than soybeans and have advanced themselves that much further along in the process. Because of that, there are some significant differences in what we expect going forward, at least over an intermediate to longer term outlook.
For the short term, we continue to expect price pressure. Corn for the past month has been able to hold in a relatively tight range between around $3.58 Dec and $3.80 Dec. We remained within that range this week despite week over week declines but as harvest starts to ramp up, its likely we will soon test the $3.58 support level followed by a breach and perhaps another 25 or 30 cents of pressure before it’s all over. Yields are improving; that said our opinion is that yields are probably close to the 170 level, not the 175 or 176 bu speculated by some, but also higher than the 165 some that’s being published by our preferred yield model. As we mentioned this week, there is probably more chance of ultimate tightening on the corn balance sheet as acres may come down some and yields eventually won’t match the highest end of trade estimates.
Longer term, we would refer you to the discussion above in soybeans. Corn is simply not competitive AND has a tighter balance sheet than soybeans. Soybeans could easily slide to a $9.25-$9.50 area in the coming months. If that happens, a “normal” price ratio of 2.5:1 would indicate a corn price of $3.80 futures. However, we would also speculate that given the comparative stocks to use on those balance sheets, the price ratio should actually be even tighter, perhaps a 2.2:1 level. That would indicate prices closer to the $4.31 level.
As has been the case in the past month or six weeks, wheat has entered a different phase of its pricing cycle as winter wheat harvest wraps up and the market has picked up on various global issues. There’s quite a few things going on in wheat that would offer support and while we won’t rule out another break lower, the market appears relatively more stable than that of corn or soybeans.
The primary issue to remember for wheat is that there is no shortage of pure bushels. In fact, the market was reminded of that this week as the International Grains Council released their world production estimate and raised production by 11 mmt over their previous estimate and now nearly identical to what was seen in last years record breaking crop. Bushels out of the Black Sea in particular are growing rapidly while perceived risk to the Australian crop due to the developing El Nino faded as we approached August and conditions weakened and rains appeared. The EU is also working on a big crop. That, however is where the problems start to show up. None of them enough to cause a rapid reversal in fortune, but enough that the market has something to talk about.
In a word, quality. Quality is a big focus right now, not just for U.S. HRS producers who have their own struggles right now with vomitoxin, slow harvest, spotty test weight issues and a crop that is starting to lay over because its been too wet to get to. The EU has had an even worse time, struggling for the past six weeks or so against rain after rain. While production projections are huge, the amount of the crop meeting milling quality has rapidly slipped. In fact, as we alluded to last week, France has turned to purchasing Lithuanian wheat in an effort to blend their own wheat to a higher standard. That move was met with resistance this week after one of France’s largest buyers announced it would not accept wheat of mixed origin, but the idea is the same. Those with high quality milling wheat will be rewarded. Canada has not yet started harvest but given their weather conditions have been about the same as the bulk of North Dakota, analysts are speculating that their quality will also be diminished.
As influential as all that is, we would be remiss if we did not discuss the Ukrainian/Russian situation of the past week. Obviously this has been an ongoing issue with wheat futures spiking every time something happened. That’s the case again this week, although this rise in tension has the appearance of something a bit longer lasting and a bit more serious. Russia’s out and out invasion of Ukraine has sparked outrage with even the usually neutral Swiss stepping into participate in banking sanctions against Russia. That itself is a rare move, but more notably, Russian President Putin seems to be making less effort to hide the fact that Russia is backing the separatists, in fact going so far late week as to call Ukraine “New Russia” and to compare the Kiev Government to the Nazi oppressors seizing Russian village in WWII. Friday, he went so far as to remind everyone that Russia is a Nuclear super power. Now, we wouldn’t suggest that any military action by anyone outside of Ukraine or Russia is imminent, but if Putin has his heart set on claiming what appears to be particularly the port areas along the Black Sea, there is a longer term chance that at some point we will see some sort of logistical interference. Exporters in Russia also remain cut off from financing at least from the west, although one would speculate that eastern countries could still provide financing. IF (and that’s a medium to big IF, even at this point) the fighting has a direct effect on wheat, its still sometime off.
We would point out that Russia’s ban of western ag products was somewhat short lived; while the country is not accepting raw goods, they have given the go-ahead for Russians to purchase products made from western ingredients as long as they are processed in neighboring friendly countries.
RISK DISCLAIMER: Trading in futures products entails significant risks of loss which must be understood prior to trading and may not be appropriate for all investors. Please contact your account representative for more information on these risks. Past performance of actual trades or strategies cited herein is not necessarily indicative of future performance
Miller Risk Management is a subsidiary of Clayton Pope Commodities of Champaign, Il. If you have any questions on these comments, please call Katie at 701-730-3352Share