Posted on November, 14, 2022 at 09:44 am
Traditionally the time after the November USDA report is slow in the grain business. Harvest is all but wrapped up, bushels are all but put away, final field work before winter is getting done and we slowly work our way into holiday mode. While on the cash side of things I don’t expect it to be much different, the futures market seems poised to shake it up a bit.
Looking out into next week there are several things I am watching. Of course, I continue to monitor what is happening when it comes to the Black Sea corridor. The deadline to create a new agreement looms next Saturday, but according to the initial agreement signed in July, if neither party gives advance notification of withdrawal prior to the deadline, it shall continue as is for another 120 days.
Top UN officials met with a high-level Russian delegation in Geneva on Friday. A report released by the UN after the meeting indicated the parties discussed what it will take for the ‘full implementation’ of the two agreements signed at the end of July.
Russia continues to contend the UN has not followed through on the memorandum of understanding the two parties signed regarding the facilitation of fertilizer and grain exports. According to the UN report, the two parties updated each other on the progress being made when it comes to the ‘unimpeded export of food and fertilizers originating from Russia.’
The UN went further to say they updated Russia on their progress when it comes to facilitating payments, shipping insurance and what it will take to grant access to European Union ports for grains and fertilizer shipments, adding that the first load of donated fertilizer from Russia is set to head to Malawi this week.
The UN reiterated their call for all actors to expedite the removal of any remaining impediments to the export and transportation of fertilizers to countries most in need. This likely a reference to reports the UN is negotiating a rollback of sanctions against Russia’s main agricultural bank with the US, UK and EU, something Russia claims is absolutely necessary.
Looking out into the week ahead I feel Russia will continue to use the corridor to push back against sanctions that are beginning to really bite economically as well as a way to increase cash flow if they are able to really ramp up their export pace.
With November wheat exports out of Russia expected to outpace last year’s volumes, it is interesting to see how hard the UN continues to push for wide open Russian exports.
If available supplies are anything close to what Russian analysts and officials are claiming, Russia will have an additional 625 million bushels of wheat supplies available for export this marketing year versus last. This potentially making the Russia story a bearish factor in the market these next few months, after having it be a bullish catalyst for the last nine—though of course the ever-present risk of a breakdown in communication should provide some level of support.
Like the last several weeks, in addition to Black Sea developments, we will be watching what is happening when it comes to China and its approach to Covid. With China accounting for much of the world’s growth in commodity demand the last several years, how quickly they reopen and shore up their economy will continue to play a major role in market direction.
China confirmed rumors that had been floating for weeks now regarding a rollback in quarantine requirements as well as the cancellation of an international flight circuit breaker. While their National Health Commission says this is a tweak to rules, meant to optimize zero-Covid, many have taken the steps as a pivot in the country’s approach to the control and prevention of Covid, hopeful a full rollback of lockdowns and regulations isn’t far behind.
The fight against Covid in China has had interesting effects on consumer demand and has also impacted their cash market structure significantly, as logistical challenges due to lockdowns, or travel restrictions into regions considered high risk have created pockets of big demand with limited supply. The recent dislocation of stocks has sent cash meal prices to record highs in some provinces, helping to bolster crush margins, and subsequently helping increase bean import purchases.
China was reportedly a big buyer of soybeans from both the US and Brazil last week, with the USDA keeping a big jump in Chinese bean imports in their global market figures for the year ahead on the back of expected increases in demand and improved margins for importers.
The spread between Brazilian and US corn offers into the global market has shrunk significantly from just a handful of weeks ago when Brazil was over $1.50 cheaper than the US, though it remains relatively wide at around 75 cents. With China approving Brazilian suppliers for import last month, it is likely a good amount of Brazilian corn will begin to head in that direction, though importers as a whole have remained relatively quiet, with domestic demand signals for corn in China mixed at best.
Finally, in the week ahead I will be watching how the conversation surrounding inflation and the inflation trade develops. For so long commodities have been a buy on the idea inflation was out of control and likely to continue as such. But with US CPI figures coming in lower than anticipated this past week and many expecting peak European inflation is coming soon, some are beginning to say the inflation trade is over.
With an estimated 270,000 contracts of speculator longs in the corn market as of a week ago Tuesday and a similar amount of length in the soybean complex, do we begin to see the group that has been a big driver in market strength since late 2020 head for the exits?
With the USDA surprising us with a yield bump in last week’s supply and demand update for soybeans and corn, the supply story that has driven market interest since August is beginning to fade.
Yes, we are watching dryness in Argentina with concern as farmers there have decided to delay much of their corn planting until December in the hopes rain will return to the region. But Brazil so far seems on track to produce record wheat, bean and corn crops in that order, with weather forecasts through year-end indicating relatively benign conditions for the bulk of the country’s production regions.
While we have a long way to go before we feel comfortable with global supply, the world’s end-users do not seem to be panicking—though the same may not be said for some in the Western Corn Belt as basis pushes in the region have defied delivery economics and have folks wondering what it will mean for the corn market the rest of the year.
Cash corn market spreads are a dollar between end users 150 miles apart in some parts of Iowa, as those with supply on hand are making those in need pay extra to incentivize movement of bushels sooner than they may have planned when they were put away.
Early basis strength as being reported has never been seen before, but many experts caution that years of similar early strength have hardly seen those values carry forward, as every bushel an end user buys early is one less bushel they have to buy later.
The week ahead should be an interesting one as though it is hard to believe, it is the last full week before Thanksgiving, potentially pushing some to close out positions and button up trades ahead of that traditional holiday slowdown.
Source: Barchart