Market sentiment has turned very negative over the past three weeks. Traders cite deflationary fiscal policies, lack of demand (particularly for corn), concerns about a possible slowdown in ethanol and biodiesel demand following last week’s EPA announcement, and lower Russian prices competing with US wheat.
But there are also untruthful stories out there that have been passed around that have resulted in additional sales. When we start hearing things that don’t have reliable confirmation of these stories, we usually see a bottom or a top in the markets.
These stories often result in traders holding onto positions that are not profitable to vouch for. And that’s usually surrender.
The truth is – fiscal policy is designed to drain the general price structure. This fact determines the big macro picture in which we live. Eventually, layoffs will push unemployment to 4.5-5.5%, and this decline in our economy’s income will eventually be reflected in lower demand for equipment.
This lower demand will eventually translate into lower prices as inventories build up. Home prices are likely to fall further as they deal directly with the impact of higher mortgage rates, a slowdown in home exchanges and a slowdown in home refinancing. It will also be affected by the potential for layoffs that I mentioned.
Lack of corn export demand?
The story of lack of demand is a bit misleading. There is no doubt that this is a real problem as we are at a very slow pace in corn exports. However, at this time of year exports usually increase. We hope that we will see an improvement.
Corn sales rebounded last week while shipments lagged far behind. We need to see export sales hit 36.6 million bushels a week and shipments 49.3 million bushels a week to match the USDA numbers. That’s why so many traders are revising the USDA’s export numbers down a bit – and we’re trading with it.
Soybean volatility explained
No one is talking about the bullish demand news. Still, soybean exports are well ahead of what they need to be to meet USDA requirements. Sales last week were 25 million bushels versus the 17 MBU needed and shipments were 77.8 MBU versus just 34.5 MBU.
The pace of soybean exports should slow as Brazil takes over our export markets from late January/early February, but it looks like we are on track to at least meet USDA forecasts unless China starts buying cancel.
Given the political row between the two countries, cancellations are a very serious issue – but they’re not likely until China sees the certainty of a South American bumper crop. That won’t happen for about 8 weeks.
Demand for ethanol is good, and most plants have achieved profitable margins for the next quarter or two. The EPA story last week was pretty negative compared to most traders who see huge potential in biodiesel, but maybe it’s actually healthy for the market.
Last week’s announcement allowed the market to sell off and the market was way ahead of its skies considering bean oil prices which were as strong as compared to soybeans and soybean meal. Realistically we should not trade this premium yet as it will take a few years for the biodiesel plants to be built.
Although the story was reverse, it brought soybean oil, beans, and soy flour back into a more normal ratio.
Wheat demand outweighs politics
As for wheat, Russian prices are sharply reduced. Personally, I had hoped that the story of Russia’s shipments of wheat, now identified as Ukrainian wheat, would have reinforced feelings among allies and non-allies alike to avoid Russian wheat. I guess getting groceries is more important than politics.
However, the decline in wheat has been so dramatic that it has found economic value domestically. We’ve heard of feedlots in the west buying durum wheat #2 for feed. That tells you that the wheat market has found value relative to corn and other feed grains.
The markets are looking to 2023
As we move into the Christmas holiday program the USDA’s report is usually minimal and we usually see unwinding of positions before the year end followed by consolidation followed by a story that catches traders off guard and out of position. The end result is usually a fairly volatile move and we return to normal.
Deflationary history aside, grain and bean inventories are still very tight. The only way to solve this is with two very successful production cycles – first in South America and second here in the US. It will take months so we expect economic value based on tight inventories to hold these markets and get them back into range We have a better handle on the South American crop and are beginning to calculate how US farmers are cultivating acreage for be targeting in 2023.
The macro and micro discussion of these markets, along with detailed strategies on how to leverage these stories, will be discussed in depth in our Farming for Profit, Not Price Outlook Conference on February 6th. Please visit our website at AgMarket.Net for details and to register for our Nashville meeting. If you have any questions you can call our team at 844-4Ag-Mrkt.
Reach Bill Biedermann at 815-893-7443 or [email protected].
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