The grain markets actually found a little bit of stability this week. Everyone in the market is trying to get used to the new normal of volatility and we got a little bit of a break this week. Compared to pre-war markets, this would have been considered a very volatile week, but after what we have been through the last few weeks it actually felt a bit quieter for the grains. Grains were content to stay mostly within the ranges we have already seen but this was not the case for cotton. I think the markets have gotten a bit numb to the headlines going back and forth.
We continue to see the utter destruction of Ukraine. Putin has overreached and there is a real opportunity to create a new world order as so much of the world is uniting in opposition to Putin. Let us hope and pray this opportunity is not squandered. China is certainly taking note. I cannot state enough how much production is at risk. Even if they are able to plant a normal crop, so much of the infrastructure for storing and shipping to export is now gone even if we get a ceasefire tomorrow.
USDA will be releasing grain stocks and more importantly prospective plantings next Thursday March 31st at 12 am. This report will bring a lot of volume and probably volatility. Private estimates have been trickling out already and will continue through USDA report day. The market seems to be looking for a modest decrease in corn acres from last year and an uptick in soybean acres. This is not going to come close to fixing the world balance sheet shortages. Any additional acres we are able to bring into production were out of production for a reason and will therefore hurt average yield. With inputs at record levels it will be much more difficult for the market to coax these marginal acres back into production.
We could see a big move on report day in reaction to USDA’s acreage number, but if it is lower I think it will be short-lived. I will not be chasing the market lower. The market needs all the acres we have and more to overcome the loss of some of the most fertile land in the world. We have not even thought about the possibility of a production issue in the US growing season. La Nina has strengthened significantly despite the forecasts calling for it weakening. A strong La Nina has a very high correlation with US drought. The La Nina winter has already wreaked havoc in South America as we continue to see write downs on their crops. We are starting off the season very dry in a lot of areas. Dry to start off the season is either going to push people toward more drought resistant crops like cotton or milo or we are going to see people lowering seeding and fertilizer rates. Either way there are going to be less corn bushels to harvest.
We have seen rare admission by China of some significant production issues. There was a high profile meeting in Beijing and the country’s agricultural minister was shockingly frank. He told reporters “China faces big difficulties in food production because of unusual floods last autumn and our crop conditions this year could be the worst in history. Flooding last fall damaged almost 30 million acres of crop and delayed planting on 18 million acres of wheat, a third of the total.” They also have more than 6 million metric tons of corn bought from the Ukraine that they are going to have to buy from somewhere else. That is 236 million bushels! The US balance sheet does not have that much to give up. The market’s job is to ration a dwindling supply and we have not even begun to slow demand yet. Users of grain and oilseeds are still making money. They are not slowing usage.
Everything is not just gloom and doom. India has a bumper crop of wheat and we are seeing some countries purchase from India that do not typically buy from them. Australia should have excess production to spare. There was some rain this week in the wheat belt that was much needed although the market is debating how much benefit there is long term. It at least bought some time.
What To Do
My guidance for the upcoming week remains little changed. Scale in old crop sales as needed to satisfy cash flow needs. You can scale in small on new highs. At the price levels we are at, there is no shame in selling out here and also no shame in holding a little to see what happens. There is tremendous upside potential. I am being a bit more patient on new crop. I have been encouraging sales at key levels in both corn and soybeans. Again, no shame in having booked some previously or in scaling in at $6.50+ corn and $15 beans but I do not think you need to be too aggressive. I do not think we have seen the highs yet in corn, beans or maybe even wheat. There was a forum hosted by the Farm Foundation earlier this week and one of the economists on the panel put it bluntly saying, “God help us if we have any weather problems this season!”
Cotton
Cotton saw significantly increased volatility this week compared to the grains which have calmed down just a bit. A short squeeze in the old crop as mills are forced to price and increasing drought conditions in unirrigated regions of west Texas are helping support the market. Cotton is late to the party and needs to make sure it does not lose too many acres.
I am including below the updated drought monitor as well as the production maps for Ukraine again so you can picture them when you see news reports about the location of the fighting.
