Volatility, war in Ukraine, key factors in grain markets now

Factors that have affected the grain markets for the last year are still in play and “volatility is here to stay,” in the words of John Heinberg a market analyst with Total Farm Marketing, a Wisconsin-based marketing firm.

At the annual Agricultural Outlook Forum on the University of Wisconsin-Madison campus, Heinberg noted that factors including South American weather, China’s potential grain purchases, a possible U.S. recession and the war in Ukraine continue to be factors that affect grain markets.

In the corn market, highs were established in May of 2022 and the soybean market put in its highs in June “but we are still trading at historically good value,” he said. One factor that bears watching is the demand-driven market and what supplies are going to be available.

Ending stocks for both corn and soybeans are at historically low levels and last year’s drought, plus the war in Ukraine, didn’t help replenish supplies. The USDA report that outlined Supply and Demand for the last crop year threw the market a curve ball, he said, as the report lowered corn acreage by 1.6 million acres and lowered the yield for soybeans by six-tenths of a bushel.

“That caught the market by surprise. End users thought it (the crop) was going to get larger,” he said. As a result of that smaller harvest, there was a price jump for both commodities. “These are historically extra tight supplies.”

Heinberg said one of the calculations that market analysts like to look at is the stocks-to-use ratio – which is a way of stating how many days of supply are available to end users of grain. It expresses stocks as a percentage of usage. Corn is currently under 10 percent and soybeans are extremely tight at 5 percent.

Globally, corn is still relatively tight, compared to demand and part of that relates to the war in Ukraine. No matter what happens with that war, it will be a long time, he predicted, before the grain supply from that region improves ‒ due to damage to the infrastructure.  But in the soybean complex, “there is a monster crop coming out of Brazil,” he said.

Brazil and Argentina are set to produce a whopping 20 to 25 million metric tons more soybeans than they did last year.

Cash markets for corn have remained good overall, he said, as prices are trending above five-year averages. The shortage of supply has meant that basis levels – the difference between futures prices and the local cash price -- have remained good. That’s because elevators have to pay more to farmers to get them to sell grain out of their bins.

Those basis levels for corn have stayed strong across the Midwest, he said. The same is true in the soybean market where there are very good basis levels nationally – well above the five-year average.

The corn market has an “east-west” problem, Heinberg said. The USDA report shows a billion-bushel shortfall that is needed for feed in the western Corn Belt. That corn is not there due to the dry conditions last year. “That is supporting the corn market – the competition for domestic demand versus export sales. It has carried over into lack of export sales, which is something the market is extremely concerned about,” he said.

Corn export commitments are down 911 million bushels for the marketing year, or down 46 percent compared to last year. This will probably be the year that Brazil surpasses the United States as the world’s largest corn exporter, he predicted. Brazil signed an agreement with China last year to sell them corn. “China seems to want to do everything they can not to buy U.S. corn,” he added.

“When the market sees a corn sale to Mexico it doesn’t react at all. The market wants to see sales to China.”

The soybean market is tight, he said, but is in pretty good shape with regard to exports. Beans are ahead of USDA’s target pace for exports at 1.668 million bushels or 5 percent higher than last year.

Domestically, soybeans are having a moment as well, with additional soybean crush plants coming on line in response to soy diesel demand. Heinberg mentioned a new 40-million bushel plant in Shell Rock, Iowa that will require soybeans from 800,000 acres of land yearly to reach capacity.

There are more plants coming on line across the Corn Belt and their crush capacity will help supplant the export sales that may be lost to South American producers, he added.

The market always worries about the managed funds and the flow of money they bring in to invest in the commodity markets. Those funds are “record long” in soybean meal at the moment and the value of those meal contracts “is as large as we’ve seen in the last year,” he said.

In the coming growing season, weather patterns may point the way to changes in grain production and market prices. The La Nina weather pattern that has dominated over the past three years, affecting grain production in the United States and in South America, is shifting to an El Nino weather pattern, according to most weather analysts. In general that change in the Pacific Ocean’s temperatures brings wetter weather to the southern Plains in the United States and could point the way to better crops in the coming year.

Moisture there would be generally good news for U.S. wheat growers. Some have wheat acreage in the Plains that hasn’t had moisture in two years, reported one market analyst.

According to USDA, 47 percent of U.S. corn acreage is still in some level of drought and 39 percent of our soybean acres are also in drought-stricken areas.