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Sunday Scaries: What I'm Watching This Week In The Grain Markets

Barchart - Sun Feb 25, 8:33AM CST

 2024 is not even two months old and it has already cemented itself into my memory as one of *those* years. The ones that teach you lessons you didn’t realize you needed to know. 

This week felt difficult when it came to pinning down one topic I wanted to discuss. There are so many moving pieces in this market but most of them are known. An analyst I deeply respect likes to say, “a known fundamental is a worthless fundamental,” yet here we sit on week 12 or so of speculators selling and end users buying hand to mouth on the same batch of known fundamentals.

From an on-farm risk management standpoint, one of my biggest worries over the last year has become reality—and worse yet, it has happened far sooner than I would have ever expected. 

With the March corn contract dipping below $4.00 this week and soybeans joining in trading to new contract lows, it is easy to say most farmers across the US and around the world are now looking at prices well below their cost of production. While the recent drop in price is not unprecedented, it is incredibly unusual for this time of year. According to data provided by AgTraderTalk, the drop in corn prices from December 1st to mid-February is the largest on record, dating back to the mid-seventies. 

The timing and scope of this drop in price is especially problematic for farmers looking at bushels sitting in storage that have seen values drop nearly $1.00 for corn and $2.00 for soybeans since harvest with impending cash flow needs presenting hard deadlines.

Slow farmer selling is reported around the world, with farmers everywhere waiting for a price improvement that is slow to come. While the funds have taken their short position in corn to a record, the length on the commercial side has grown to record long. 

There has been some conversation about the commercial long and what it may mean. The length for the commercial is indicative of grain sold in the physical market that does not have a short futures position attached to it. For some this development can be confusing, but it is important to remember, this does not mean the elevator is speculating on a move in futures in the least. 

The length for the commercial is mostly indicative of either grain sold or being used from delayed pricing or basis contracts. In market set ups like these, delayed pricing and basis contracts become a tool used by farmers to move bushels. Grain still needs to be delivered even in times of low futures prices, with both contract types giving the farmer a way to move bushels into the pipeline without having to make a final pricing decision. 

While many times when grain movement is especially low, end users or elevators will offer free delayed pricing options, many times the delay in pricing decisions comes with a monthly cost. 

One of the biggest problems with basis contracts in a carry market is that if futures continue to fall and we come to the end of the futures period under which the contract was originally written, the farmer must choose between pricing at the current futures price or rolling the contract forward. When rolling forward, the farmer is given until the end of the next pricing period to make the decision but must add the current spread to the original basis, many times incurring a roll fee of a couple of cents as well. 

For example, if a grower were to have written a 30 under the December basis contract for bushels delivered in November and rolled it to the March board when the carry was 22 cents, they would now have a 52 under the March contract, likely 54 under net with fees. 

With first notice day for the March contract coming at the end of the week, the farmer is now having to choose between cashing their contract out at around $3.45 net before any discounts or rolling to the May for around 14 cents less the 2 cent roll fee. This would result in a basis of almost 70 under the May board. 

With the market seeming to seek out and punish its most vulnerable participants, this week’s move, while violent, should not have been entirely surprising, as decisions in angst are being made around the country. 

In other news, it is hard to believe we have officially entered year three of the war in Ukraine. While in some ways it feels like only yesterday the invasion took place, in many ways it feels as though the war has been going on for ages. Perhaps the most amazing development in all of it is how accustomed traders have grown to two of the world’s largest grain exporters being at war. 

The invasion and subsequent adjustments seen to grain flows that took place shortly thereafter should be a lesson for all of us that physical commodities will almost always find a way to get from where they are to where they are needed. As it turns out, money most definitely does talk. 

It is interesting to note that even with the new, largest one-time sanctions package ever announced by the US, the administration still avoids targeting Russia’s metal, energy, and agricultural industries. The lack of direct sanctions or restrictions in those sectors has kept Russia’s ability to finance the war alive, with over 1% growth expected in their economy in 2024. 

Of course, with everything surrounding inflation, consumer prices and the economy in focus, the last thing any world leader wants to see is a jump in prices reminiscent of the spring of 22. The risk of course remains that something happens impacting grain movement out of either country, but until then both seem content offering supplies at levels well below their competition.

Looking ahead to what I am watching this week, I know I am not alone in searching for signs the economic outlook for China has stabilized. Feeders continue to struggle with poor margins, though there are some bright spots starting to show with increased poultry demand and piglet prices rallying back to last summer’s highs. 

The Chinese central government continues to provide support to the economy while avoiding direct to consumer stimulus. Restrictions on short selling, cuts to mortgage rates and allowing local banks to rewrite the terms on upwards of 5,300 struggling property projects across the country could provide the necessary support to right the economic ship. A major gathering of the country’s leaders will kick off the first week of March as well, opening the door to additional support being announced. 

With a decent amount of beans said to be left to buy for April/May/June shipment by Chinese crushers and Brazilian values weakening, signs of life when it comes to Chinese demand this week would be a positive change in pace if seen.

Surveys for the USDA’s planting intentions report will start to circulate at the end of this week. With prices falling well below the cost of production across much of the country, I am hearing lots of stories from fringe acres of farmers looking at alternative crops. From planting forage crops on marginal ground and grazing cattle, to an increase in dry beans, farmers are looking at other ways to make money on their ground without planting corn or soybeans. This change in outlook could open the door to some surprising shifts in acreage estimates throughout the month.

I will be having a webinar with John Homenuk from Empire Weather this week, talking about what we can expect this spring and beyond. Will we see planting delays from his calls for above normal rain in March and April? What does the transition from El Nino to La Nina mean for summer weather? 

John is always great to talk to and full of knowledge, feel free to register for that here to join us live or receive the recording.

As always, don’t hesitate to reach out with any questions. Have a wonderful week!

More Grain News from Barchart
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

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