The agricultural markets had two very different halves during the month of April. Coming off supportive stocks and acreage reports on March 31, all three markets made new recent highs on the first trading day of the month, says Chad Burlet of Third Street Ag Investments, LLC.
Over the next two weeks, the markets traded mostly sideways, supported by a number of fundamental factors. On the 18th the markets revisited the April third highs and old-crop corn and soybean futures set new highs for the month. After that, all three markets fell apart, losing 6-12% in the next seven sessions before recovering slightly today.
As April opened the bullish inputs were everywhere. Argentina was enduring its worst drought in 50 years. Russia had refused to renew the Black Sea Grain Initiative (BSGI) for another 120 days, insisting on a maximum of 60 days. As record snow continued to fall in MN and the Dakotas, concerns about flooding and preventing plants were rapidly increasing. China had just finished a massive buying program of US corn and was shipping more corn and soybeans out of the US than had been expected in April. Russia had forced the Western firms out of its export market and told those that remained that FOB sales below $275 per metric ton (MT) were not welcome. The six-month drought continued in the southern plains of the US and large areas of HRW were a complete loss.
As US futures markets reflected all these risks some crucial disconnects started to develop. US HRW and HRS wheat had become the most expensive wheat in the world and the South American cash basis for corn and soybeans was plummeting. The market ignored the first vessel of European wheat when it came into FL, but when Brazilian soybean cargoes were getting sold to the US east coast it was too much to ignore. The Brazilian cash soybean basis had fallen to $2.00 under Chicago futures. Chinese crushers were buying soybeans cheaper from Brazil than central US crushers could buy them from local farmers. Argentine crushers were able to operate very profitably with soybeans imported from Brazil and Paraguay.
On the corn side, the US had expected a large window from February through June when it would be the cheapest origin in the world. Even when Brazil had record February exports the market remained optimistic. The large Chinese buying program in March strengthened the exporters’ confidence. Unfortunately, for the bulls, Ukraine continued to prioritize corn shipments, and the cash basis in Brazil and Argentina had started to fall. By the start of this week, corn from Argentina was roughly a dollar per bushel discount to the US for May and June, and Brazil corn was more than a dollar discount for July forward. The final straw came this week came when the USDA announced that China had canceled 560K MT of their US purchases. China has 3.5 million MT of purchases yet to ship from the US and a meaningful percentage of those sales are now at risk.
The dramatic drop in prices has created a few important changes which may help our markets stabilize, at least for a while. New crop US SRW is now the cheapest FOB wheat in the world. While ocean freight spreads will preclude business into North Africa and the Mediterranean, business in the Americas and the Caribbean should improve. Crop insurance prices for corn, soybeans, and spring wheat were set in February. New crop cash prices have now fallen far below the insurance price. Planting efforts in marginal growing areas will be reduced accordingly. We should expect a meaningful increase in prevented plant acres. Estimates of US corn and soybean carryout have started to move higher, but 5-6 million prevent plant acres will more than offset those increases. US weather will be at the front of everyone’s mind for the next six months. As such, we favor the long side of volatility.
Learn more about Chad Burlet at Third Street Ag Investments.
