Bullish or bearish?

By Jon Scheve, Superior Feed Ingredients, LLC

Last week:

• July corn was up over 20 cents

• December corn was up nearly 20 cents

• November beans were up 6 cents

• July wheat was up more than 45 cents

It has been 50 days since the start of the war in Ukraine and during that time:

• July corn is up over a $1 per bushel

• December corn is up nearly $1.25 per bushel

• November soybeans are up only 14 cents

• July wheat is up more than $2.25 per bushel

While beans were already up due to dry conditions in Brazil, concern over Ukraine’s loss of export capacity has shaken the corn and wheat markets causing prices to rally more than 20% in less than 2 months.

Reasons to continue being bullish

Ukraine

Ukraine will likely not get 25% to maybe as much as 40% of their corn crop planted this year. More importantly, 500 million corn bushels (nearly 50% of yearly production) remain trapped in storage there from last harvest due to an export blockade by the Russian navy in the Black Sea. 

There has been some hope that Ukraine could export grain to western Europe by rail, but it is logistically difficult. Normally only 2% of Ukraine’s total exports are moved to western countries by rail because the rail track gauge (width) in Ukraine and western Europe don’t match. This means when shipping west each Ukrainian railcar must be transloaded to other countries’ railcars, and this process currently takes 30 minutes per car. While there have been efforts to ramp up the volume of cars being moved and transloaded, it’s unlikely Ukraine could exceed 30% of their total exports this way. In the past month they have only been able to move between 5 and 10 million bushels this way. Plus, moving grain by rail would also double the cost and time it takes to move grain compared to export facilities on the Black Sea.

The city of Odessa and nearby ports are important Ukrainian grain export hubs, even more significant than how New Orleans is for U.S. grain exports. This means whichever country controls Odessa will control Ukrainian grain exports. And if facilities there are damaged or destroyed, it could take years before the region is a reliable global source of corn and wheat again. In the end, it may not matter if Ukrainian farmers get their crops planted if they do not have anywhere to move it.

U.S. export pace

With uncertainty around if or when Ukraine grain will be shipped, demand is being rationed with higher values. Therefore, right now the market is watching U.S. export pace carefully. If export pace continues to increase to levels like last year, then U.S. carryout will be as tight as last year. This tightness would then carry over to the next year’s crop as well unless there are more than an additional 1 million corn acres added to the mix by June and we have normal weather conditions this summer.

La Niña concern

La Niña conditions increase the chance of dry weather in the U.S.’s southwestern Corn Belt, and right now there is a 60% chance La Niña conditions will last through the summer. Any chance of a dip in trendline yields will cause prices to rally further unless a lot more corn acres are planted. However, conversations I have had with seed dealers suggest there have been few if any changes to farmers’ planting intentions.

E15

It was announced that E15 would be permitted year-round. However, only 2% of all U.S. gas stations carry it currently. Early estimates suggest this will only lead to 25 million more corn bushels added to the ethanol grind unless more fuel stations are willing to carry it and consumers are willing to buy it.

Wheat

Hard red winter wheat growing conditions are the second lowest in 30 years and 20% below normal for this time of year, particularly in the southern plains. Since wheat in the southern plains competes with corn in feed rations, despite the area not being a major corn growing area, it could help corn values moving forward some.

Reasons to be bearish

Gas prices

While expansion of the E15 is good, higher fuel prices could affect overall fuel demand as consumers may drive less.

High feed prices

Animal feeders in general will continue to face issues with profit margins if prices continue to rally. Additionally, the spread of bird flu has been sizeable and will likely mean 25 million fewer corn bushels will be fed nationally this year.

China

China has continued to keep covid restrictions in place, which has led to less factory output. These lockdowns could mean less productivity and less money in their economy. It could also mean less food demand moving forward. 

There have also been profitability concerns in China’s hog sector and soy crushing industry. This could mean a demand pull back for corn and beans.

Milo

Milo’s basis values in the U.S. are lower than a year ago. From a nutritional value perspective, milo should trade at a discount to corn in the U.S. However, U.S. milo basis values seem to be down because demand from China is lower than in the past. Traditionally, Chinese buyers purchase milo because they can get around import taxes in China. This helps to keep milo trading at a premium to corn in this country. This drop-in basis may be an indication of larger issues in China that could spill over into other feed commodities. 

India

India has not been a wheat exporter in nearly 8 years. However, last year they produced a record crop. With their inventories so large, and wheat prices so high, they are looking to be an export player on the world stage this summer. This may put a dent in wheat prices, which could lead to some downward pressure on corn over time. 

Brazil

Depending on the weather over the next four weeks, Brazil’s second corn crop could still be large. This may be an opportunity for buyers of Ukrainian corn to replace their trapped purchases due to the war. 

Futures values

Futures values are incentivizing U.S. farmers to plant more corn despite higher fertilizer prices. If a few farmers change their planting intentions this spring prices could pull back later this summer.

Bottomline

The world is used to having four large corn producers, the US, Brazil, Argentina, and Ukraine, to buy from. Having one major player possibly unavailable indefinitely, places risk on the rest of the world’s buyers. Plus, the increased risk potential of La Niña impacting U.S. yields this summer could mean more upside potential than downside risk. 

Please email jon@superiorfeed.com with any questions or to learn more. Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.

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