Grain futures are back to the conversation that we had one year ago. Currently in the United States there are nine grain and oilseed commodities with tight ending stocks. Mother Nature was cruel this summer with oppressive heat and drought. Not only the U.S., but the entire Northern Hemisphere was not able to produce bin buster crops due to the drought conditions.
While current market fundamentals are supportive due to tight supplies, demand has been slowly creeping lower as global end users try to only use the bare minimum of what they need as prices are already lofty. The corn and soybean market prices have been trading in lackluster trading ranges for weeks. The market is waiting for fresh news to dictate a reason for a price breakout higher or be on the look out for a black swan that could negatively affect demand for grains and send prices lower. Let’s take a closer look at corn, soybean and wheat fundamentals as we head into the final months of 2022 and get ready for 2023.
Soybeans
U.S. soybean ending stocks are at a tight 200 million bushels. On the most recent U.S. Department of Agriculture report, the USDA reduced yields to 49.8 bushels per acre. The demand was also tweaked with the crush increased to 2.235 billion bushels, while export demand was reduced to 2.045 billion bushels. Looking ahead to the November USDA World Agricultural Supply and Demand Estimates report, traders will be wondering if the USDA will make any changes to the spreadsheet or wait one more month before making any significant changes.
Traders are also watching the South American soybean crop that is being planted now. The world is expecting Brazil to produce a record crop, and that is already priced into the market. Any signs of a less than record crop or weather scares will be supportive to prices in December and January.
In the meantime, soybean prices continue to trade in modest trading ranges. But if you step back and look at the bigger picture, make no doubt about it, the November 2022, the January 2023, March 2023, May 2023 and July 2023 soybean futures charts are all consolidating into a “pennant flag” formation, and this particular pennant flag suggest that there is a looming $2.50 a bushel price break out coming.
When we see these “pennant flags” on charts, all we know is that a potential price breakout is likely coming and traders can estimate how big the price move will be based on the price range of the flag. What we do not know, however, if the price move will be higher or lower, as the actual market fundamentals will ultimately dictate that.
If the fundamentals justify a higher price point, add $2.50 to $14.25 (the likely breakout point for the May soybean futures 2023 chart) and you’re looking at a higher price objective of the $16.75 price area. ($17.00 would be extreme overhead technical resistance on charts.) And also remember it can take months for those final price objectives to occur.
Now, what if there is a negative black swan of demand destruction? Or what if South America is able to produce a record crop? This market could easily move $2.50 lower also. A $2.50 price move lower from $14.25 points to $11.75. Are you ready for that?
Corn
Corn harvest continues to wrap up around the Midwest. We continue to hear clients tell us that yields were primarily average to below average. Soon we will find out if the yields in the better producing regions of the country will be able to offset the devastated yields in drought-stricken regions.
My hunch is that in the upcoming monthly USDA WASDE reports, the U.S. corn yield will continue to inch lower than the 171.9 bushels per acre nationwide yield listed now. Yet, I also feel that we will likely see the USDA reduce demand for exports another notch on the upcoming report. The net result would likely be that ending stocks continuing to linger near the 1.1-billion-bushel mark.
The U.S. is the world’s largest corn exporter, and many of our global customers who rely on importing corn from the U.S. recently seem to only be purchasing their corn import needs hand- to-mouth or in smaller amounts. Some of this might be due to higher global corn prices and a higher U.S. dollar. Yet could it be that these countries are waiting to hear if potentially the American farmers could ultimately pull off a larger crop than expected? Are they also waiting and hoping that prices might work a touch lower before their next round of corn needs to be purchased?
Please note that the USDA has been reducing export demand for corn since the May USDA WASDE report. Back in May of 2022, the USDA pegged 2022-23 corn exports at 2.4 billion bushels versus the most recent export number of 2.15 billion bushels. Compared to previous years, export demand is down, due to higher prices.
In 2021-22, the U.S. exported 2.471 billion bushels of corn, and when China had its buying spree back in 2020-21, the U.S. exported a whopping 2.747 billion bushels of corn. Due to higher prices, a higher U.S. dollar, the USDA has been doing a good job of showing that demand for corn has been reduced. This is priced into the market already.
Also priced into the market already is the fact that Brazil has the potential to export larger amounts of corn due to not only a larger crop but also a recent agreement to sell corn to China. Chinese corn imports for 2022-23 are pegged at 18 million metric tons. Chinese domestic demand continues to climb, currently pegged at 295 mmt, up from 291 mmt 2021-22, and also up from 285 mmt in 2020-21 due primarily to an increase in feed demand. Their hog herd is being rebuilt.
Also keep in mind that even though China will now allow Brazilian corn imports, China will still require Brazil to prove that the imported corn is not contaminated and meets some of the various production and inspection standards China is asking the Brazilian producers to adhere to.
Don’t forget our other very important countries that buy U.S. corn. Did you know that Mexico has purchased the most U.S. corn so far this year? Followed by China, Japan and Canada with Columbia, South Korea, European Union, Taiwan, Honduras, and Guatemala rounding out the top 10 importing nations.
My final point is corn is currently fair priced. Demand reduction has been included on nearly every single monthly USDA WASDE report since May, (while also the size of this U.S. crop has been getting smaller as well). Quite frankly, I’m not sure how much additional demand destruction could actually occur for corn, it would take a black swan event. Look for your local cash markets and basis to tell the story of local demand. A bigger price move in the futures market would stem on South American production and U.S. corn needing to compete for planted acres in spring.
Wheat
Drought continues to plague the southern Plains. The winter wheat crop is planted but concern continues regarding potential production. U.S. wheat ending stocks continue to get smaller with the most recent number coming in at 576 million bushels for all wheat.
Globally, there is concern regarding production with a smaller crop in Argentina, and the quality of the Australian crop is in question due to recent heavy rains. Of course the world continues to focus on the happenings of Ukraine and Russia. Global stocks are also on the decline
For the short term, grain prices may continue to trade in very small trading ranges. However, the window of sit and wait and see will be coming to a close soon as the coming weeks will produce plenty of headlines to keep traders on their toes for clues about this potential price breakout.
There is an important presidential election in Brazil in late October, the Fed meets in early November to likely raise interest rates, U.S. elections in early November, there is a USDA report coming up on Nov. 9, the railroad strike, and of course keeping an eye on the grain corridor in Ukraine and ultimately weather in South America. While the outlook continues to be primarily friendly and supportive for prices, be ready for anything.
Editor’s note: Naomi Blohm is a marketing advisor with Total Farm Marketing by Stewart-Marketing and she is a regular contributor to the Iowa PBS series “Market to Market.” She can be reached at [email protected].
