By Jon Scheve, Superior Feed Ingredients, LLC
The financial markets have been pulling back the past week. While interest rates moved higher, gold and oil moved lower from their highs a few weeks ago. With one of the top 5 most influential USDA reports being published Thursday, some traders seeing a pullback in outside markets are concerned the information in the upcoming report could be bearish, so they are banking some profits now.
The May Report
Thursday’s USDA report is important, because it will estimate the upcoming marketing year’s supply and demand for the first time. However, it is important to remember these estimates guess what supply and demand will end up being 16 months from now, and there are a lot of variables that can change these values during that time.
Corn still trending higher
Since the Ukraine invasion on Feb. 24, corn has increased nearly 90 cents (shown in the chart below). On Friday, corn posted only its third consecutive down day of trading in the last six months.
While corn is down 50 cents from the highs posted just two weeks ago, corn prices dropped 87 cents after the Ukraine invasion from their high of $8 through the end of March. During that market pull back there was not even two days in a row the corn market traded lower.
This recent set back does not have to mean the highs are in, it could just be the start of a healthy correction after a $1 rally over the last 6 weeks.
Looking back at 2021
December corn futures had 5 moves between April 1 and June 30 where prices moved more than $1 per bushel. Three of these moves were higher and two were lower (shown in the chart below).
It seems reasonable to expect similar volatility this year given the unpredictability of both war and weather.
While this year’s planting pace is one of the slowest in history, it does not necessarily mean the national yield will fall below trendline. Late planting can increase the chances for lower yields, but summer weather has the final say on production.
However, if planting pace continues to be slow, it is unlikely additional corn acres will be planted this year. If fewer acres are planted, it could mean tighter supply and demand. And if there would be any moisture issue this summer, it could mean much higher values.
Brazil’s crop conditions are not getting better as they move into their dry season and the second corn crop approaches maturity. Estimates continue to show the potential for a slight shrink in production.
As the war continues, surprisingly Ukraine farmers are expected to get a sizeable portion of their corn crop planted this spring. Unfortunately, Ukraine does not have enough storage to continue holding last year’s grain and next year’s crop too. Until Black Sea ports reopen for export business, which seems highly unlikely any time soon, food insecurity worries around the world likely increase.
While there has been a push to export grain by rail through other countries, the rail gauge difference between western Europe and Ukraine is making this very difficult. Ukraine logistics were built around the Black Sea and changing that flow of grain would take years.
We are now entering the 60-day period of the year when the market reacts most to U.S. weather forecast changes. War is just as unpredictable as the weather, and there are no clear answers for the direction of fighting in Ukraine. In over 77 years, there has not been a marketing year that has had to deal with war in a major grain producing country like this, so trying to guess when the highs and lows are in place is difficult. There is a lot of risk in the market right now, and prices could move substantially in either direction.