Agricultural futures markets in the US and Europe weakened slowly in February, with US corn, wheat and soybeans mostly ending the month down 5-7%, it said Chad Burlett from Third Street Ag Investments, LLC.
The slump was most severe in the corn market, with a few positive days before the recovery towards the end of the month. At its lows, it was a dollar per bushel below its early December highs. Unfortunately, many farmers were forced to either sell their corn or pay 15 cents/bushel to convert their base contracts from the March contract to the May contract.
A month ago we wrote that South American production near the high end of estimates would put us in a situation where not all available U.S. acres would be needed. At times it felt like the market was trying to stop marginal production. In several key regions of the world, prices have fallen below total production costs. However, very few have fallen below variable costs and we believe we have removed very few acres from production. Longer term, we found the USDA's 10-year baseline forecasts very interesting. They expect that the area under cultivation of the eight most important crops in the United States will be 6.3 million less by 2027 than last year. They see the US as a marginal producer.
Despite this worrying outlook, we note some encouraging signs. While the corn markets in the US and Europe collapsed, the corn market in China recovered. They have been a strong buyer of corn, sorghum and barley, and their import margin on U.S. corn is at its highest level in a year. In the soybean market, Brazil's FOB prices were at a discount of up to $2 per bushel to FOB US prices. Brazil is still a clear disadvantage, but that gap has been halved.
US politics always play a role in our markets, but the number of important issues in Washington appears to be higher than usual. Ukraine has shipped more than 30 million tons (MMT) through its humanitarian corridor, but President Zelensky said they may not be able to keep it open without additional U.S. help. Washington is also making two important decisions regarding ethanol. They agreed to allow eight Midwestern states to sell E-15 year-round, but pushed back the start date to 2025. They will also soon decide whether corn-based ethanol will be eligible for sustainable aviation fuel tax credits. The final item in Washington is the Farm Bill, which is already six months overdue. Environmentalists see this legislation as an opportunity to advance their agenda, and agricultural state lawmakers are aggressively pushing back against it.
Weather always plays a key role in our markets, but March is a month where we need to keep an eye on both the Northern and Southern Hemispheres. Safrinha cultivation is underway in Brazil, as is corn cultivation in Texas. In North America, Europe and Asia, winter crops are emerging from dormancy. There are currently no severe weather concerns, although the “watch list” is slightly longer than normal. Traders have covered some of their short positions, but they remain shorter than usual as the U.S. growing season begins. If the forecast turns out to be poor, it won't take long for markets to recover this month's losses.
Learn more about Chad Burlet at Third Street Ag Investments.
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