Navigating the Ups and Down of the Corn and Wheat Market.
Last week December’23 corn futures were marginally higher than previous week as end of the quarter short covering and chatter about the USDA lowering the yield in the October WASDE report started. December wheat futures continued their descent as the strengthening dollar and lackluster export demand pushed the Chicago ’23 and the Kansas City ’23 contracts into multiyear lows.
The US corn balance sheet is a fundamental headwind for futures prices and the Commitment of Traders report acknowledges this sentiment. The managed money short position is seasonally the 4th largest in 10 years and the net position is the second shortest. As we have been writing about, there is no fundamental sense of urgency to own either December’23 or future US corn demand. From the estimated 2.2 bbu ending stocks to lack of export competitiveness to stagnant feed demand, the bears have been correct. This does not mean that US and global fundamentals are set in stone. We see upside price risks for US corn originating from US harvest related risks, Ukraine export disruptions, and China entering the US export market. We also are looking at the soil moisture configuration, dryness, in Argentina and to a lesser extent Brazil as planting season in the southern hemisphere starts in October/November. While we are reluctant to overemphasize the Chinese demand and southern hemisphere weather in late September, we believe that these variables can provide potential upside price risks for US corn futures.
For a 2.2 bbu ending stocks, US corn export sales are a challenge and the weekly pace is generating concerns. Spot, +30 and +60 day FOB spreads favor Brazilian corn loaded at Parana and Argentina Up-river over US corn from the Gulf. Mississippi river’s low level is a major concern. Barge traffic has slowed and rates have escalated which has reduced available export supplies and is keeping FOB values high. These FOB premiums are holding exports back. Because we see export demand as key to clearing corn supplies, the overarching bearishness of the entire US export paradigm in the short and medium-run continues to generate bearish price sentiments. Last week US wheat futures made new multi-year lows as poor fundamentals amid a strong US dollar and a massive Russian export program continue to limit price appreciation. The December’23 contract made its lowest price since October 13, 2021. The Chicago December’23 contract touched lifetime lows this week. News reports that Ukraine is defying Russia’s naval blockade with aggressive military moves and started exporting wheat from the port in Chronomorsk gave the financial trade hope for more supplies in the world export market. We still see major risks to wheat and corn exports from Black Sea origins and believe that the financial markets may have grown overly complacent in pricing geopolitical risks.
Our sentiment has not changed for US corn and wheat. However, we see value in owning the Corn March’24 $490/535 call spread as a hedge for end users to protect against some of the potential upside risks that we list above. We also see value in owning the Chicago Wheat December’23 $580/635 call spread to protect against Black Sea driven geopolitical volatility.
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