Times of Stress for Crops and Traders

Corn was certainly the feature for the month of January and it ended with a bang. The six million metric tons (MMT) of sales that were just announced to China were the largest ever for a single week, and we still must add in the business that was done to other destinations, says Chad Burlet of Third Street Ag Investments, LLC.

For the second month in a row March corn futures made new contract highs on the last day of the month. In December nearby corn futures rallied 64 cents and in January they rallied 63 cents, making them the 10th and 11th strongest months in the last 21 years. While corn rallied 13% this month, wheat and soybean futures lagged significantly, gaining only 3.5% and 4.5%, respectively. With hopes of a record US crop this summer, new crop corn futures also lagged old crop, gaining only 10.5 cents.

Chinese buying was the lead story as it has been for the past six months. Their shortage of feed grains is proving to be larger than anyone imagined. They auctioned over 85 MMT of corn, wheat, and rice out of government reserves and they are now in the process of importing 35 MMT of corn, barley, and sorghum. They also imported an extra 4 MMT of meat in 2020. It would have taken an additional 20-25 MMT of feed for them to produce that meat domestically.

In its monthly WASDE report, the USDA includes a breakdown showing the “World Less China” for a number of different crops. This month their World Corn Supply and Use analysis showed ending stocks of only 92 MMT when China wasn’t included. That number should be reduced to 85 MMT in February. At the same time world use including China will rise to 1160 MMT. It may appear like apples and oranges to exclude China’s stocks but include their demand, their 35 MMT feed grain import program, and their $10-$11 per bushel domestic corn price have shown that their available carryout is close to zero. For the world that will confirm a ratio of available carryout to total use of 7.3%, the lowest ever. Any problems with the current Argentine corn crop or the Brazilian safrinha crop, which will be planted in February and March will create a significant rally.

Combining that corn situation with the US’s second tightest soybean carryout sets up a major acreage fight this spring in the US. January was about a standoff between those two crops with the ratio between November soybeans and December corn close to 2.56:1. A well-respected analytical firm has already projected that the two crops will capture 184 million acres, three million above the previous record. We’ll learn what the USDA economists think about acres at their Agricultural Outlook Forum on February 18-19. Then, at the end of March, we’ll get the results of their early-March farmer survey.

While record Chinese imports have tightened the world and US balance sheets for both corn and soybeans, South American labor issues have tightened the US soybean balance sheet even further. A combination of work stoppages and blockades cut Argentine soybean crush by 60% in December, which pushed more product export business into the US. That allowed us to continue our record crush rate. After four months NOPA crush was already 43 million bushels ahead of last year versus a USDA projection of only +35 for the entire year.

The next labor disruption is scheduled for Monday in Brazil. The government has taken steps to try to encourage independent truckers and oil workers to continue working, but the outcome is very much in question. That risk and the rain-delayed harvest have motivated China to buy an additional 0.5-1 MMT of February soybeans from the US. Brazil’s January exports were only 15% of last year, which had already put more business into the US before those February trades.

The world wheat balance sheet is not as tight as corn or soybeans, but export restrictions and taxes in key exporting countries have helped rally that market as well. In an attempt to control flour and bread prices Russia is implementing a 25 euro/MT export tax on February 15 and a 50 euro/MT tax on March 1. In Ukraine the government and exporters had agreed last fall to export a maximum of 17.5 MMT with only an estimated 3 MMT left unsold. Now the government in Argentina wants to follow the Russian example and “decouple the domestic prices from the international price.” Given that government’s track record of controlling food prices by penalizing farmers, the trade is very concerned about possible export restrictions.

Going forward we expect volatility in all three markets to remain high and we believe prices have a greater risk to the upside. The corn and soybean balance sheets in both the US and the world are precarious and have no margin for error. We cannot afford a production problem anywhere in the world in 2021. We may be able to produce our way out of this, but there will inevitably be times of stress on both crops and traders.

Learn more about Chad Burlet at Third Street Ag Investments.