Weekly Market Update – February 4, 2022

Soybeans have been the leader again this week and have been making new highs. As with any move in the market this big, there are several things driving it. We have been talking about the dry areas in South America and extreme heat for a while now. Some of the dry areas have gotten much needed rain and yet you would not have guessed it from looking at the soybean market for the last few weeks. There is a certain amount of damage that is already done but some growing areas will benefit greatly from the rain. The market is watching crop size estimates get cut and that is part of what it is reacting to. Weather will continue to be important through the rest of the South American growing season and then as we get into our planting season. If the right scenario plays out in the weather, we could go to record levels. We do not have enough of a buffer in stocks. The market will have to ration some demand and with overall inflation we are not close to a level to slow demand yet. However, the weather could turn the other way too. There is a lot of risk in both directions in a weather market.

In addition to the weather risk premium in the market, we are also trading on Chinese demand. South American beans are offered at cheaper levels than US beans, so why have they been buying from us this week? They are not doing it for fun or just to be nice to us. They may be more worried about more write downs of South American crops. The uncertainty about why they are doing this and how much they are planning on buying is really adding fuel to the fire on the bullish side for soybeans.

Beans have also benefited from near record strength in the edible oil market and strength in the energy markets. A shortage of edible oil (like soy, palm and canola) has driven all the oils to very high levels but does not seem to be slowing demand yet. When you throw in talk of biodiesel, you add to the bullish case.

Domestic crush has been extremely strong as well. Crushers are making money hand over fist right now so we have not gotten anything to a level to even begin to slow demand. If the crop write downs continue to the level where demand rationing is needed, we are going to have to go higher than the levels we are at now to do so. Looking at something that is more in the long term, FC Stone mentioned in their morning comments there have been two announcements in the past week of new soybean crush plants in the US. They note that there are 11 new plants slated to open between the end of 2022 and early 2025. If all of these new plants come online, it will greatly increase our capacity for domestic crush and drastically change our balance sheet.

What To Do
Our price range has shifted a lot, but we still should have old crop mostly sold. As mentioned above, a weather market is a cruel mistress. It can turn way more quickly than you can get an order executed. You do not have to do it all at once and can scale in small increments. Last year’s crop was made with last year’s input prices so you are at very profitable levels here. Gamble with the last 15 or 20 percent, not the whole thing.

I recommended sales at $13 which should be profitable levels depending on yield. That means $14 should be even more profitable. You do not need to make big sales, but I think everyone should be getting some sales at these levels.

Corn struggled to get many headlines this week and the ones it did get were not bullish. Wednesday we got a report showing ethanol stocks are rising faster than production for the fifth straight week due to slowing exports. The market did not react well to this news but our ethanol prices are now more competitive and many world buyers are looking for alternative energy sources due to fears about supply disruptions tied to war threats. Ethanol was the savior of corn with record margins this fall. When exports were slow, ethanol plants were grinding as much as they possibly could. Margins have tightened now but with energy prices on the rise and summer driving season ahead, they should stay supported.

Ukraine is a big exporter of corn so the threat of conflict has added a premium to the corn market. Strength in wheat has spilled over to corn. The sense this week is that we have stepped back from the brink of war. The US State Department has dropped the word “imminent” to describe a possible Russian attack. Doing my best to translate diplomatic speak, this means tensions are not as tense as the markets had priced in last week. Everyone is guessing about the odds of conflict here, the market is struggling to gauge it.

Export report on Thursday was bullish as levels were at the upper end of the range. However, the Chinese cancelled a cargo of corn and that was announced on Thursday as well.

Despite small setbacks, corn should continue to stay well supported. I have not seen anything this week that leads me to believe we are seeing anything more than a temporary correction. Energy prices are strong and corn cannot afford to give up any acres to beans as we go into the insurance base price averaging period.

What To Do
Similarly to beans, find levels and scale in old crop sales. Look for good basis levels before selling. We have had opportunities almost everywhere. I would be more patient on new crop and work orders close to $6 futures.

Wheat has pulled back on the perception of decreasing tensions in Ukraine. Russia and China announced a pact for energy, wheat and barley. All classes of wheat have taken a big hit this week. It is still very dry in the US wheat belt and in the Black Sea. The market had priced in risk of conflict but has very little weather risk priced in for the US or FSU. Wheat was the only commodity not helped by the export report this week as we see another week of extremely sluggish export commitments. Recent weakness in the US dollar on top of the break in prices should help our wheat be more competitive.

If you are bullish wheat, this pullback may be a good time to buy some calls. Otherwise, I am not recommending anything down here. Wait for a move back over $8 on weather or increased tensions. I do not think we are done with the yoyo of tensions yet.

Cotton continues to march higher on exports and support from the outside markets. Exports this week were the highest since early June. Economic data from the US looks stronger this week as US payrolls grew sharply in January. The dollar was also weaker which added to support and energy prices much higher giving an additional tailwind. One thing that may have been holding the market back a bit was that shipments have lagged behind commitments over the last few months leading some to believe that we could see significant cancellations of purchases but shipments rebounded this week easing some of those fears.

New crop cotton now that we are seeing strong demand, needs to make sure it does not lose any acres and that is what it is attempting to do as we set the insurance guarantee price in the month of Feb. I have been a seller of new crop cotton for a while now and I think that we need to continue to scale in sales now that we are through $1 and have touched $1.04/pound.