Sunday Scaries: What I'm Watching This Week In The Grain Markets

Having started trading grain in January of 2005, I have seen a handful of booms and busts when it comes to pricing cycles. The booms in values always had the same things in common, a feeling of euphoria and an idea the run in price would continue for the foreseeable future. Unfortunately, they always tend to also bring with them an undersold farmer and a bruised end user hesitant to extend significant coverage.

I think we can all agree we have entered the downturn portion of this cycle, with corn and soybeans struggling to find solid support—something we have already watched wheat experience, with the Chicago contract losing over $2.30 cents from mid-summer highs to November lows and falling over $3.00 from contract highs.

While the fall from summer highs was not necessarily surprising as the weather across much of the Corn Belt stabilized from July into August, the speed at which we have lost the last 50 cents in corn and dollar in soybeans has been breathtaking. What makes the most recent leg the most problematic, is it has taken many producers still long 2023 production from barely profitable to looking at locking in losses if they liquidate today.

With the producer inherently long physical grain around the world, as I discussed a few weeks back here, farmers and those who work with farmers, myself included, are now finding themselves searching for signs of price improvement, looking for anything that could hint a rally is around the corner. This week we are going to look at the major factors that influence grain prices, starting with cash values around the world, moving to geopolitics and ending with money flow, searching for signs the worst is behind us.

What Is Cash Telling Us?

If you are looking for something positive, cash is unfortunately not where it is at.

While domestic values have shown signs of strength, much of that is because of reduced grain flow due to logistical slowdowns caused by weather and by a farmer who is an unwilling seller. Bean spreads had strengthened in a big way at the end of the year, with that strength carrying into the start of delivery for the January contract. Corn spreads had strengthened into last Friday’s report as well, wrongly giving some a glimmer of hope that there was less grain in the countryside than initially expected.

Some of the strength in US values could also be attributed to the uncertainty surrounding production in South America and the uptick in buying seen from mid-November into mid-December as hedges against significant crop losses. While Sinograin’s purchases of US soybeans had gotten plenty of attention, many had missed the quiet uptick in corn buying done by Japan, Colombia and unknown, though Mexico’s aggressive buying was often discussed.

The uncertainty over South American production was seen in Brazilian cash values, as basis levels there started to strengthen. The driest start to a production season on record had Brazilian producers hesitant to sell, taking them out as a competitor in the corn export market until July at the earliest. Brazilian farmers and commercials held tight to soybean supplies as well, worried that they would need them to facilitate February export commitments in the case of an outright crop failure.

With the improvement seen in weather over the last month, a stabilization in the crop outlook and the pressure of early harvested supplies starting to be felt, Brazilian basis values have done a very abrupt about-face the last couple of weeks.

Brazil’s self-imposed absence from the export market had me bullish corn exports for the first time in over a year over the holidays, though it appears that was unfortunately short lived. According to Agrinvest, a Brazilian cash brokerage and analytical firm, corn sellers began to overwhelm buyers with available supplies last week, prompting buyers to move to the sidelines late in the week, hoping for signs of a return in export demand.

While Brazil’s corn market feels squishy and a little ill defined, their soybean market’s message has been clear, with a 60 cent drop in values last week, even with falling futures. The lack of Chinese soybean demand is glaring, with limited buying reported as private crushers in the country continue to deal with negative margins. Signs of improvement need to first come from the country’s hog industry, though that looks unlikely in the short-term, as one publicly traded group announced it was running at less than 70% capacity, while another said it had over $75 million in unpaid debt it was struggling to service.

With the market growing so accustomed to robust Chinese demand, it seems all we can do is wait for it to resurface, with some suggesting that it could be April before we see a significant recovery.

What About Geopolitics?

It does not appear we will be short of geopolitical developments in the year ahead either, with uncertainty in the Middle East and Asia on the rise, while the situation in the Black Sea continues to be worrisome.

Taiwan held their election yesterday, with the Democratic People’s Party winning its third presidential election in a row. The country’s newly elected president is the candidate China had warned against, having called him a troublemaker and separatist. The DPP losing control of the country’s legislature to the more middle of the road KMT party, with the Beijing friendly TPP winning 8 seats is likely enough though to mitigate some Chinese anger over the presidential election results.

The UK and UN launched airstrikes last week against rebel targets in Yemen, opening the door to further aggression in the region. Iran has announced its displeasure with the move, while Saudi Arabia is said to be watching the situation. With the US facing what is expected to be a hotly contested election this year and talk of problems at the higher levels of the department of defense, I do worry this is the year many around the world decide to lash out. With inflation continuing to run hot in many developing countries too, the pockets of angry citizens seem to be growing, making flare ups nearly inevitable.

Money Flow

Finally, the one glimmer of hope I do have. Funds have moved to some of their shortest positions in many years, something that is incredibly unusual for this time of year, especially in corn.

With funds now moving to Covid level short positions across a whole host of ag products, it feels as though it will be difficult to see them press the situation further, though I must admit the catalyst that pushes them to cover these shorts in earnest feels difficult to find.

Many times, the cliché, it is the darkest before the dawn rings true in trade, as it seems when we think it can only get worse, we find our way to some type of price recovery. I expect the same to be true here as a desire to push bearish bets much further may be limited.

Of course, while we must remain aware any major price run will be limited in a big way by farmer selling, it is only a matter of time before we start to again encourage end user pricing and stabilize the overall outlook for demand.

In the end, I am waiting to see what this week brings, hopefully we see signs of short covering and some end user buying with the big unknown of the USDA numbers out of the way. As always, don’t hesitate to reach out with any questions, have a great week and stay safe! 

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