United States grain producers are still the world’s most productive and can compete with anyone in the world, but world prices are set by many factors including drought, the war in Ukraine, logistic hiccups, Argentina’s economic woes, the Brazilian harvest, and even petroleum prices. On the positive side, input prices have fallen significantly and margins are up for soybean producers.
Those were some of the messages emerging from a recent Harvest Report given by experts at Rabobank, the global agricultural bank with headquarters in the Netherlands. Steve Nicholson, a global strategist in grains and oilseeds, began by showing a global drought map showing widespread drought in most grain-producing areas—especially Europe. While temperature ranges have been within historical averages, minimum temperatures have been higher than normal, especially at night when plants usually recover from the heat.
Logistic affects
The drought has also affected grain logistics, including the Rhine and Danube rivers in Europe. While Brazil has invested in its infrastructure in recent years, ports, road and rail infrastructure is still lacking. Drought conditions this year have negatively affected Amazon Basin and Amazon River shipping.
Both the Rhine River and Panama Canal have suffered cargo restrictions and rate increases due to low water. Russia’s repudiation of the Black Sea grain export agreement has begun to show up in Ukraine export figures. While Ukraine export numbers have done better than expected, production is still down between 25% and 35% from prewar averages, with an overall decline of 34% in grain and oilseed exports from a prewar peak. Ukraine has become less dependent on Black Sea ports that are under threat from Russian missiles, which have targeted Ukrainian docks and terminal infrastructure in recent months.
“The importance of the Danube River corridor cannot be overstated,” Nicholson said. “Investments are being made there in light of concerns about long-term viability of the Black Sea.” The port of Constanta in Romania is going to become increasingly important in Black Sea movements, Nicholson said. Russia itself remains a huge wheat exporter. Charts displayed by Nicholson showed that major global corn exporters are holding approximately 23% of the world’s corn stocks; China alone holds on to approximately 65% of that total. China is also holding about 52% of the world’s total wheat stocks.
Global soybean exporters are holding about 60% of global soybean ending stocks. While global stock-to-use ratios are at a “comfortable level,” Nicholson said, those ratios of exports are falling. Concerns about the Danube are intensified because of the conflict between Russia and Ukraine and its effect on Black Sea movements. “The importance of the Danube River corridor cannot be overstated,” Nicholson said. “Investments are being made there in light of concerns about long-term viability of the Black Sea.”
Oil and ag prices connected
Owen Wagner, senior analyst in grains and oilseeds, spoke for 10 minutes on how petroleum prices became linked to commodity grain prices. “West Texas intermediate crude prices have to be included in any discussion of commodity ag prices,” he said. Strong links between petroleum and ag prices began in 2006-07, mostly due to the adoption of the Renewable Fuel Standard and have recently strengthened. Today about 10% of total soybean oil production is related to RFS, which has become “the tail that wags the dog.”
But “renewable diesel has gotten ahead of itself,” said Wagner, since the Environmental Protection Agency sets the numbers of required mandates, known as a renewable volume obligation—the most recent of which is lower than industry capacity. This has resulted in a temporary glut in the market that has “tanked” soybean oil prices, reducing prices for soybean oil and also for renewable identification numbers.
Wagner pointed out that the Saudi economy is projected to shrink by 1.5% in the year ahead due to production cuts. After months of collaboration with the Saudis to attempt to control exports and therefore prices, Russian exports are now at their highest levels in three months. But unlike in past years, the Organization of the Petroleum Exporting Countries is in a much weaker position today. Prior periods of sustained cuts have translated to lost market share for OPEC—U.S. has added most rigs since March.
Other factors linked to soybean oil prices include OPEC’s attempts to control exports, and Argentina’s failed “soy dollar” experiment. The Argentine experiment did not increase exports as hoped, the Argentine peso is now trading at between 450 and 500 to the dollar, and “Argentine farmers are beginning to catch on,” according to Wagner. Brazil is enjoying record crops, but Wagner pointed out that it must “import its fertility,” meaning fertilizers.
Acreage battle between corn and soy?
Andrick Payen, who also covers grain and oilseeds, said recent price ratios are pointing the way toward more soybean acres in the U.S. In the most recent World Agricultural Supply and Demand Estimates from U.S. Department of Agriculture, lower yields were reported for both corn and soybeans—but massive corn acreage is keeping corn prices low.
Payen seen an acreage battle between corn and soy in the coming planting season, but with no total acreage expansion. He also expects a slight decline in wheat acreage. He said both corn and soybean prices will continue to be supported by renewable fuel demand and global logistic disruptions.
Input affordability improving
Prices of farm inputs are getting more affordable, according to farm input analyst Sam Taylor. In the past year, average herbicide prices have declined by 50%, fungicides by 40%, and insecticides by 20%. Interest rates are still high, with 8% finance costs versus 0% in recent years, but margins have improved for soybean producers.
There has been a “bounce-back” in global fertilizer demand as stocks are replenished, with all growing geographies calling for an increase.
David Murray can be reached at [email protected].
