Uncertainty Ahead As Prices Come Under Pressure
Teucrium | January 31, 2023
Grains: Uncertainty Ahead As Prices Come Under Pressure
Market Update
Jake Hanley, Managing Director / Sr. Portfolio Strategist
Grain markets have experienced a turbulent start to 2023, with wheat prices leading the way lower. There are several factors influencing the grains market, from shipments out of the Black Sea, to production levels in South America and developments in China. In this note, we will review the wheat, soybeans, and corn markets and discuss the various factors that could influence prices in the near-term.
Wheat
Wheat prices have been pressured lower as shipments continue to flow out of the Black Sea. Additionally, Russia produced a record wheat crop this year, and has plenty of wheat to sell. Still, market participants may risk becoming overly complacent as the war is directly impacting production. Just recently the head of the Ukrainian Grain Association has announced that due to the war and ongoing economic hardships Ukraine will only produce 16 mmt in the coming year. That is 23% lower compared to last year’s crop, and more than 50% lower compared to the ’21-’22 crop year (i.e. last harvest before the Russian invasion). What’s more, the recent US and German agreement to arm Ukraine with tanks increases the risk of further escalations. If we learned anything in 2022 it is that when the market “gets it wrong,” it moves fast to “get it right.” With wheat prices back at pre-war levels there just might not be enough of a risk premium built into the current market.
Soybeans
The soybean market is focused on South America. Brazil is expected to produce a record soybean crop of 152.9 MMT - an 18% increase year-over-year. However, Argentine production estimates have been lowered due to drought conditions. South American analyst Dr. Michael Cordonnier is expecting Argentina to produce 39 MMT, which is 10 MMT below current USDA estimates. Still, the expected losses in Argentina are more than made up for with Brazilian production. Soybean prices may fac continued pressure in the coming weeks as the Brazilian harvest progresses and production estimates are realized.
Corn
US corn exports have been disappointing as China is increasingly turning to Brazil for corn. It’s no secret that US – China relations continue to sour, and it is likely that Chinese buyers will do their best to avoid purchasing US corn. However, China is likely to turn to the US for corn demand that Brazil fails to satisfy.
The majority of the Brazilian corn crop has not yet been planted. Near-term delays in the Brazilian soybean harvest could lead to delayed corn plantings (recall that Brazil has two growing seasons, and farmers typically plant corn immediately on the heels of their soybean harvest). Planting delays are not ideal and could result in reduced yields. Still the USDA’s Brazilian corn production is estimated at 126 MMT, up 8% year-over-year. It would appear that Brazil will have plenty of corn to sell.
Conclusion
Overall, the grains market has faced a bumpy start to 2023, with wheat leading the way lower. A steady volume of grain shipments out of the Black Sea has been a major factor. South American weather has been mixed leading to production issues in Argentina. However, Brazil is expected to produce both a record soybean and corn crop. While the grain markets have been pressured in the early part of 2023, global balance sheets remain relatively tight compared to history. Therefore we do expect continued price volatility, even if the overall trend is for prices to move lower back toward production costs.