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Market Commentary for 4/22/22
For the week:
- July corn is up 3 cents
- December corn is down around 10 cents
- November beans are up 3 cents
- July wheat is down about 30 cents
The corn market seems to be running scared, probably because there are reasons it can go to $10 this summer and also reasons it could be at $5 by fall.
The Case For $10 Corn
Ukraine
Ukrainian farmers will likely get a lot of their crop planted this season; however, it is uncertain where they will be able to sell it. This week the Russian army destroyed a railroad bridge heading to Poland, and it is possible more rail lines heading out of Ukraine could be destroyed if the war continues. If this happens, it will take a lot of time for them to be replaced. Plus, there are no Black Sea ports open under Ukrainian government control. Until these ports are operational again any grain stored in Ukraine won’t be able to find a buyer, including next year’s crop. Ukraine accounts for 20% of global exportable corn bushels, so it would be very bullish if the export blockade lasts another year.
China
China owns most of the corn stuck in storage in Ukraine. If they decide to replace that corn with either US and/or South American product, world stocks will tighten to levels that demand rationing globally. This would push prices much higher. The longer the war in Ukraine lasts, the more likely China will have to source grain from other locations and run world inventories very low.
Weather
If Brazil’s dry weather trend continues, yields will be reduced there. In the US, farmers are focused on planting. Snow and freezing temperatures in the north along with wet weather in the east are slowing progress. The later crops are planted in May, the lower yields will trend. Then, if there is dry weather in the US during summer, and yields are trimmed by even 2-4 bushels from trendline yields, the market could have tremendous upside potential.
The Case For $5 Corn
Chinese Demand
Chinese hog producers are apparently losing money and turning to alternative feed ingredients. Forecasts suggest a potential 10% pull back of soybean imports. If bean demand drops, it is likely corn demand would also decrease.
$7.50 Futures
In the past, when corn futures hit $7.50 demand decreased significantly. The chart below from the time the ethanol mandate was enacted illustrates this.
2008
In 2008 corn prices started the year off at $5, but fear of corn shortages drove prices to $7.54 by summer. Fuel prices moved above $4.00 that year and the great recession arrived soon after, with corn prices falling to $2.94 by the end of the year. The chart below shows similarities between 2008 and the current year.
More Corn Acres
When comparing December corn values to November bean values, farmers should consider paying up for higher fertilizer costs and increasing corn acres. While the market usually expects some farmers to switch a few acres based upon price changes at the last second, historically farmers do not change very many acres from their spring intentions. It is uncertain how many acres will be shifted this year, but we know that US farmers in general prefer to raise corn over any other crop. Thus, if farmers add 2 million corn acres, a lot more bushels will be added to the supply side of the equation.
Weather
If Brazil catches a few timely rains over the next 2 weeks, they could still have normal production levels. Historically over the last 50 years, the US produces at or above trendline yields 66% of the time. Therefore, the odds suggest it should be another trendline yield year.
World Economy
This week the International Monetary Fund lowered an earlier estimate of world economic growth from 4.4% to 3.6%, which is an 18% decrease in the growth rate. In a speech the World Bank President said, “Never have so many countries experienced a recession at once, suffering lost capital, jobs, and livelihoods, at the same time, inflation continues to accelerate, reducing the real incomes of households around the world, especially the poor.”
While the US is experiencing higher inflation, so too is the rest of the world. Fuel and food prices especially are going up in every country. This could lead to global economic problems at some point and reduced buying of everything by everyone.
Also, China’s continued use of lockdowns to fight covid are causing economic problems for China and the rest of the world. Chinese factories continue to run slow if at all. This is leading to less output and a reduced supply of goods for buyers in other countries. We have already seen this in the automotive industry with fewer chips available in new vehicles. If factories around the world must shut down because they do not have the inventory to produce product, ultimately there will be less consumer purchasing power.
$10 or $5?
The Russian blockade of Ukrainian grain is a major concern. Plus, Brazil’s weather is trending drier while parts of the US are either too wet, too dry, or too cold to plant. These big issues have contributed to prices continuing to move higher and pending their outcome could mean prices need to move substantially higher still.
Despite all this, there are a lot of issues that could still push corn to $5 by Thanksgiving. If more corn acres are added this spring, then good weather this summer, no increase in exports, and the war in Ukraine ends abruptly, then world buyers would be more at ease and prices could fall.
Many market traders think the grain markets will move higher over the summer, or at worst trade sideways. It seems no one wants to short the grains outright for fear of being wrong. However, it is concerning when the whole market is bullish. Plus, worried end users have seemingly covered a lot of their futures risk positions for later in the year and farmers have sold nearly nothing. The funds in general are very long and if something spooks them and they remove their long positions, there may not be anyone left to buy the grain on the way down, and things could get ugly very quickly.
When everyone is on the same side of the boat, it can capsize very easily. It may be time to put on a life jacket as a precaution.
Want to read more by Jon Scheve? Check out recent articles:
Corn Prices Continue To Trend Higher, But Can It Continue?
Will Corn Be Worth $7 This Fall? Can Beans Remain Above $14?
High Prices Usually Cure High Prices, But Are These Prices High Enough?
Futures Have Turned Sideways. Does Basis Need To Work Higher?
How Likely Is It That Corn Will Trade Below $7 or Above $8?
The Market Is In A State Of Fear And With That Comes Volatile Prices
Jon Scheve
Superior Feed Ingredients, LLC
