Chad Burlet provides a fundamental outlook of the grain sector.
These certainly are unusual times for the world’s agricultural markets. The world’s #1 producer of soybeans, Brazil, is out of soybeans, and the world’s #2 producer of corn, China, is out of corn. The former situation has manifested itself with record Freight on board (FOB) basis levels for soybeans, soymeal and soybean oil, and the latter has manifest itself with Chinese corn – cash and futures – trading over $8 per bushel.
U.S. markets started the month with a nice boost as the June 30 Planted Acres report had shown that actual acres for the eight major crops were 7.1 million below the March Planting Intentions report. Since that time, favorable weather has taken over and we have a corn futures market that made its highs on July 1 and its lows on the July 29.
For much of July it has been a story China’s record purchases of U.S. corn and soybeans being offset by ever-improving U.S. crop prospects. With U.S. futures markets located in the U.S. interior, those prices have lately become more indicative of the increases on the supply side. That has left the burden of pricing record Chinese purchases to the cash basis. We now see U.S. FOB markets for corn, sorghum, soybeans and wheat all trading at triple-digits over the U.S. futures.
Unfortunately, U.S. farmers are seeing little benefit from the strong rally in the export basis as increased transportation and handling costs have eaten up all those gains. At the U.S. Gulf, export elevations have gone from 10¢ to 40¢ per bushel in two months. In July alone barge costs have risen by 8¢ to 15¢per bushel and rail car costs have risen by 15¢ to 18¢ per bushel. Bid levels for most interior terminal markets are close to seasonal averages.
In corn we are seeing the barge market end the month on a weak note, even as we’re surprised by an announcement of 2 million metric tons being sold to China on July 30. As record yields become a realistic possibility, farmers’ calculations of the price per bushel they need to target have come down. They have been steady sellers for three weeks, even with prices dropping.
The earliest signals of China’s tightening corn market came from their futures market and from their weekly auctions. Every late-spring and summer, Sinograin, the government entity charged with managing China’s state-owned reserves, auctions off millions of tons of corn. Their percentage sold usually starts around 60% to 90% and then quickly drops to 30% to 50%. To date there have been 10 auctions and they have sold 100% every time, roughly 40 million metric tons. The government now suspects that “speculators” are participating in these auctions and they’re moving to limit participation and toughen payment terms. There are even rumors that they will auction food reserves, rice and wheat, to be used as feed grains.
With import margins over $100 million tons, Chinese buyers are importing as much as legally allowed. The government controls corn imports by limiting the volume of Tariff Rate Quotas (TRQ’s) they issue. Imports for the first half of the crop year are slightly over half of the 7.2 million-metric-ton quota, but their recent purchases from Ukraine and the United States will push them far over that total. We believe the government has granted COFCO, another state-owned entity, an additional 5 million metric tons of licenses.
With strong bullish and bearish offsets, it is no surprise that the biggest move in U.S. futures this month was a spread, with wheat gaining 7% while corn lost 7%. While U.S. weather was a dominant feature for corn, foreign weather stole the show for wheat. A steady drumbeat of crop reductions in the EU, Russia and eastern Europe helped rally world prices and U.S. futures followed along. A sharp drop in the U.S. Dollar Index to two-year lows also helped support dollar-denominated prices and made wheat the agricultural markets’ top performer.
China also plays an important role in the world wheat market. Even though they are the world’s #1 wheat producer and that they carry massive reserves, they are still a major importer. In recent years they’ve only used roughly 30% of their 9+ million metric ton wheat two-level tariffs, but there is a discussion this year that they may use all of it. If so, that would cause a significant draw down in major exporters’ available stocks.
Unfortunately, for U.S. wheat exporters, the high transportation and handling costs for corn and soybeans also apply to wheat. While our futures markets appear moderately priced our freight-on-board offers of cash wheat do not.
While corn and wheat futures took divergent paths, soybean futures took the middle road and are close to unchanged for the month. In the products, soybean oil took the gold medal, up 4%, helped by strong palm oil prices and reduced availability out of Argentina.
Argentina is the world’s leading exporter of soymeal and soybean oil and they have struggled all year. Limited farmer selling and Covid-19 interruptions have combined to hold their crush rate 15% below last year. FOB basis levels for South American soybean oil are now an incredible 500-1000 points above U.S. futures.
On the soybean side, Brazil has set an export record for six months in a row. With a strong domestic crush, they are in danger of running out of soybeans before new crop. There is an incredible 5.1 MMT difference between Brazil’s estimate of their crop and the USDA’s estimate; 120.9 and 126 MMT, respectively. If Brazil is correct, they will need to import soybeans from the U.S. by December.
On the receiving end of the Brazilian soybean armada is China. They’ve done a solid job of rebuilding their hog herd and they’ve also made significant increases in their production of poultry, beef and mutton. Their soymeal trade is robust and their crush margins are strong. Their weekly crush rate has been over 2 MMT for nine of the past 11 weeks. We expect their 2020-21 imports to exceed 100 MMT.
Going forward we expect supply to out-weigh demand, particularly in dollar denominated futures. Acreage expansion in Brazil and the former Soviet Union is rampant and will continue for the foreseeable future. Large Chinese wheat purchases or late weather problems in Australia or Argentina could turn that market higher, but corn and soybeans are well-supplied.
