Compared to recent months, agricultural futures were relatively tame in January, says Chad Burlet of Third Street Ag Investments, LLC.
Their net moves for the month were surprisingly uniform with Kansas City and Chicago Wheat, Soybeans, Soymeal, Soyoil and Corn all ending 4.5-5.8% lower. Even their trading ranges were similar with all six markets trading in a band that reflected 7-10% of their underlying value. Given the uncertainties of South American weather and crop sizes, volatility was far below expectations.
While the markets were calm, the world, in general, was not. In Argentina, newly elected President Milei is struggling to get his Omnibus Bill through a reluctant Congress. In the Red Sea, the Houthi Rebels have persuaded most vessels to sail around the south of Africa rather than face the risk of attack. In Europe, farmers are protesting imports from Ukraine, tax changes, and new environmental regulations. Unfortunately, Russia-Ukraine hostilities are only a few weeks short of their second anniversary with no end in sight.
Overshadowing many of our markets is the weakening Chinese economy. China has been the primary source of demand growth for more than a decade, but both their real estate and stock markets have fallen sharply over the past several months. They are in a deflationary cycle which should cause their imports to slow. In addition, they just produced a record corn crop that is more than 11 million metric tons (MMT) bigger than last year’s record. They also announced that they will start to use domestic corn rather than imported corn to fill government reserves.
China did give the Chicago wheat market a boost in December when they bought more than one MMT of US SRW. To date, they’ve shipped very little of that wheat and the market is watching closely to make certain they don’t swap it for cheaper wheat from another origin. Also contributing to the bearish tone in the wheat market is improved weather in Australia and improved shipments from Ukraine.
In the soybean market, all eyes remain focused on South American weather. Soybean offers from Brazil and Argentina are almost $2/bushel discount to US offers. The spread is so wide that US poultry and soy processing firm Perdue purchased three cargoes to ship to the US in February. Limited shipments from Brazil to the US have happened several times in the past, but shipments have never started this early.
Soybean harvest has just started in Brazil and opinions on the size of the crop remain widely divergent. For the five top soybean-producing countries in South America, the spread in analysts’ estimates is more than 20 MMT, and for corn, there is a 15 MMT spread. Those differences translate to $2/bushel for soybeans and $1/bushel for corn. Looking ahead it’s clear all available US acres won’t be needed if South America produces close to the upper end of those estimates. The function of the market would then be to price US acres out of production. That would be a painful process indeed.
Learn more about Chad Burlet at Third Street Ag Investments.
