With the calendar about to turn over to March, attention is quickly turning toward U.S. production prospects, says Chad Burlet in Third Street Ag Investments’ month-end comments.
For the second month in a row the U.S.-China trade talks dominated the headlines and captured much of the market’s attention. As U.S. farmers face a final decision on their spring planting, the level of uncertainty is unusually high. Farm debt is up and profitable options for this year are difficult to identify.
Outside of the United States, lower world grain prices have been the theme. Wheat has been the most bearish with most cash markets $20-$25 per metric ton (MT) lower than a month ago. Russia remains the world’s top wheat exporter and their prices moved steadily higher from November through early February as they shipped at an unsustainable rate. They finally reached price levels where they were uncompetitive on two successive Egyptian tenders. That “timeout” was all their market needed as their prices then dropped $15 per MT in 12 days. That allowed them to be one of four selling countries in the last Egyptian tender.
During Russia’s absence the United States was able to make sales in those two tenders. This coincided with the U.S. government shutdown and the U.S. Department of Agriculture just confirmed that the United States was able to sell 3.6 million MT of wheat (all classes) in that six-week period. That allowed CME Group wheat futures to trade $5.00-$5.30 per bushel during all of January and the first half of February. With world prices breaking the CME is now carving out a new range which we expect to be $4.50-$4.80, basis May futures. For the month futures prices are down 11.5%.
Spreads
Kansas City wheat has remained very cheap relative to Chicago, trading at a 10¢ to 30¢ discount. Kansas City July futures have moved from $1.40 per bushel over corn to only $0.75 over. That spread will create good feed demand for Hard Red Winter (HRW) wheat in the southwest because of the wide cash basis advantage for local HRW versus rail corn from the Midwest.
World corn prices also moved lower during February. Ukraine has been exporting at an exceptional rate and remains very price competitive. Through yesterday they had shipped 15.8 million MT, up 6.2 million MT from a year ago. They are well on pace to exceed the USDA’s 28.5 million MT estimate, which would be 10.5 above last year. At the same time, Argentine weather has improved and their crop estimates have grown. They are the cheapest seller in the world for the late-summer positions. In early January cumulative U.S. export shipments were 200 million bushels ahead of a year ago. Today they are even with last year.
US-China Trade
Corn continues to be mentioned as a possible beneficiary of any U.S.-China trade agreement, but to this point all rumors of China buying U.S. corn have quickly been discredited. It makes economic sense for China to import corn, and they have bought some from Ukraine, so it would appear to be a painless way for them to chip away at their balance of trade with the United States.
We are seeing some price support from an usually aggressive buying program by South Korea. In addition, it appears we’ll have some nontraditional buying from India and South Africa, two countries that are normally self-sufficient.
In the United States the ethanol industry continues to hope for export business for ethanol and dried distillers' grains as well as new rules from the EPA allowing year around use of E15. At this point it appears corn used for ethanol will fall 50-100 mill barrels short of USDA estimates. This has caused calendar spreads to widen, but December corn futures were only down 2% for the month.
Soybeans
In the soybean market, U.S. farmers and exporters benefitted from two rounds of goodwill buying by China. That buying helped take May futures to a high of $9.45 per bushel on Feb. 1. Since then we’ve endured an endless barrage of headlines and tweets which are alternatingly optimistic and pessimistic about the prospects for a broad trade agreement.
Last Friday, at the White House, Liu He, China’s Vice Premier, said they would buy another 10 million MT of U.S. soybeans. It appears this round of buying had less advanced planning and the markets have been disappointed. However, 1.8 million MT of new sales to China did show up in today’s weekly sales summary. Questions are now being raised about Sinograin’s ability to buy additional soybeans. They manage China’s state-owned reserves and it appears they may need to sell some of their existing inventory before they can make new purchases. That is probably more of a legislated limit than it is a physical limit.
The brightest ray of sunshine for the soybean market continues to be the domestic crushing industry. Margins remain very strong, new crush records are set every month and domestic product demand is running well ahead of USDA projections. We look for the USDA to increase its crush estimate by 20-40 million bushels in March. To this point this has created an adequate offset to lagging exports and soybean futures were only 1-2% lower this month.
Planting Intentions
With the calendar about to turn over to March, attention is quickly turning toward U.S. production prospects. At its Ag Outlook Forum last week, the USDA projected that corn acres would be 3 million higher than last year and soybean acres would be 4.2 million lower. While that appears to be a reasonable starting point, we feel factors are at work which will reduce that shift. Most importantly, weather last fall and currently has been very unfavorable for field work. Last fall was cool and wet and farmers were unable to complete much of their normal field work. Now the northern portion of the Unites States is extremely cold and has a large snow pack and the southern portion is extremely wet. Everything is pointing toward delayed planting, which would favor soybeans.
Coinciding with this is a tightening of farm credit. Some farmers are having difficulty getting operating loans and others are being forced to sell some of their old crop corn before they can receive additional funds. Corn is much more capital intensive to plant so anyone in a tight fiscal situation will find it easier to plant soybeans than corn. At the same time we are seeing the ratio of November Soybean futures and December Corn futures go above 2.4:1. That is a good benchmark for soybean profitability to start to move above corn profitability. The current balance sheet for corn is much tighter than the one for soybeans and we believe these three factors will reduce the acreage shift enough to tighten the corn S&D even further.
