For the week, March corn was 3¼ cents lower and December was ½ cent higher. March soybeans lost 20¾ cents, November soybeans fell 14 cents, March soybean meal rallied $7.80 per short ton and March soybean oil lost 220 points. March Chicago wheat was a ½ cent lower, March Minneapolis wheat dropped 2½ cents, while March Kansas City wheat was a ¼ cent higher.
The lower week in soybeans was also accompanied by the March contract closing below long-term chart support of $12. So why didn’t that area hold? Jerry Gulke, president of the Gulke Group, says a combination of factors have made U.S. soybeans, and even other grains, non-competitive.
“In the past few weeks, basis in Brazil has collapsed to the point that cargoes of soybeans are being shipped to the East Coast from Brazil,” he says.
The basis drop was tied to hedge and harvest pressure from Brazil farmers selling the crop, but it came 30 to 45 days earlier than normal this year.
“The biggest concern in Brazil was farmers had not sold very much because of the weather. So, all of a sudden, they started selling at harvest,” Gulke explains. “Plus, China, oddly enough, has been backing away from buying beans from us but also from Brazil as they see a crop that’s bigger coming on in Argentina.”
Gulke says China prefers Argentina soybeans over Brazil because of higher quality.
Additionally, Gulke says shipping disruptions and higher freight costs are to blame for the basis collapse and the large carries in all the major grains.
The chart below from Phillips Analytics reflects current competitiveness of soybeans, corn and wheat to export destinations based on cost and freight (CNF). The colored legend at the bottom shows sources and the left axis shows the corresponding costs, including shipping, to various major export destinations.
Gulke says storing inventory without capturing that carry continues to be costly.
“If we use the approximate $11.50 per bushel that Brazil is selling for, it suggests what the risk may be,” Gulke says.
Selling far-out call options for the premium has helped mitigate futures losses, according to Gulke, as has a rising basis, but those methods do not mitigate being short futures.
“Unfortunately, risk management, other than crop insurance or waiting to see what happens, has lost its interest (futures/options) as money flow might have camouflaged the underlying headwinds versus what we were used to the previous two to three years,” he says.
Corn has held long-term support at $4.40, and Gulke says farmers are still holding large amounts of inventory.
“There’s some speculation that 60% of the corn in the U.S. s is still in farmers hands,” he says.
Gulke also thinks corn has a South American weather story, and, if there are any problems the U.S., could gain exports for a time.
February is a critical month for weather in South America and then the market will focus on the U.S.
“Fundamentally, were suggesting we need fewer corn acres now. Without help from the weather, we might not need extra soybean acres either,” Gulke says.
Plus, February base prices will be set for insurance and USDA might make additional balance sheet adjustments in the February WASDE.
“Let’s hope they see a global drop in production not demand,” he adds.
Gulke is speaking about this topic at the Top Producer Summit in Kansas City Feb. 5-7. For more information, send an email to info@gulkegroup.com.
