Agricultural markets had two very different halves in April. After supportive stock and area reports on March 31, all three markets hit new highs on the first trading day of the month, it said Chad Burlet by Third Street Ag Investments, LLC.
Markets traded sideways for most of the next two weeks, supported by a number of fundamental factors. On May 18, markets revisited the April highs of April 3 and old crop corn and soybean futures made new monthly highs. After that, all three markets fell apart, losing 6-12% over the next seven sessions before recovering slightly today.
As April opened up, the bullish inputs were everywhere. Argentina experienced its worst drought in 50 years. Russia had refused to extend the Black Sea Grain Initiative (BSGI) by another 120 days, insisting on a maximum of 60 days. As record snow continued to fall in MN and the Dakotas, concerns about flooding and the blocking of facilities mounted rapidly. China had just ended a massive US corn buying program and was shipping more corn and soybeans from the US than had been expected in April. Russia had pushed Western firms out of its export market, telling those who remained that FOB sales below $275 per tonne (MT) were not desired. The six-month drought continued across the southern US plains and large areas of HRW were a complete loss.
As US futures markets reflected all of these risks, some key splits began to develop. US HRW and HRS wheat had become the most expensive wheat in the world and the South American liquidity base for corn and soybeans fell. The market ignored the first ship of European wheat when it arrived in Florida, but when Brazilian soybean shipments were sold to the US east coast, it was too much to ignore. Brazil cash soybean base was down to $2.00 below Chicago futures. Chinese crushers bought soybeans from Brazil cheaper than central US crushers could buy them from local farmers. Argentinian crushers have been able to operate very profitably with soybeans imported from Brazil and Paraguay.
On the corn side, the US was expecting a big window from February to June, when corn would be the cheapest origin in the world. Even as Brazil posted record exports in February, the market remained optimistic. The major Chinese purchasing program in March boosted exporters’ confidence. Unfortunately for the bulls, Ukraine continued to prioritize corn shipments and the liquidity base in Brazil and Argentina began to shrink. Earlier this week, corn from Argentina was about a dollar a bushel off to the US in May and June, and Brazilian corn was more than a dollar cheaper in July. The final straw came this week when the USDA announced that China had canceled 560,000 tons of its US purchases. China has yet to ship 3.5 million tons of purchases from the US, and a significant percentage of those sales are now at risk.
The dramatic price drop has led to some important changes that could help our markets stabilize, at least for a while. New crop US SRW is now the cheapest FOB wheat in the world. While sea freight spreads exclude business to North Africa and the Mediterranean, business in the Americas and the Caribbean should improve. Crop insurance prices for corn, soybeans and spring wheat were set in February. Cash prices for new crops have now fallen well below the insurance price. The amount of planting required in marginal cultivation areas is reduced accordingly. We should expect a significant increase in the prevented planting areas. US corn and soybean yield estimates have started to move up, but 5-6 million acres will more than offset these increases. US weather will be on everyone’s lips for the next six months. As such, we favor the long side of volatility.
Find out more about Chad Burlet at Third Street Ag Investments.
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