Market reactions were muted across the board when domestic crop production and data from the USDA’s World Agricultural Supply and Demand Estimates were received on Aug. 11. After a challenging spring, US weather has turned mostly benign for fall row crops, and the war in Ukraine has contributed to volatility, but the impact has diminished with time, according to analysts contacted by Milling & Baking News, a sister publication of World Grain.
Perhaps the greatest challenge to grain and oilseed markets in some time came around July 17 when Russia refused to renew the deal allowing safe exports of grain from Ukraine’s Black Sea ports, followed almost immediately by attacks on Ukrainian ports and its Danube River grain facilities and threats to treat commercial vessels heading to Ukraine ports as possibly carrying military cargo.
Ukraine retaliated with a volley at Russian facilities. More recently, Russia fired shots over a commercial vessel and stopped it for inspection. In all cases since mid- to late-July, grain futures, mainly wheat, briefly shot higher but quickly turned lower. The nearby Kansas City wheat future tumbled $1.81 per bushel, or 20%, between July 24 and Aug. 15, nearby Minneapolis dropped $1.49½ a bushel, or 16%, and nearby Chicago fell $1.61¾ a bushel, or 21% (since July 25).
“The markets have cried wolf one too many times on the Black Sea (situation),” said Bill Lapp, president of Advanced Economic Solutions, Omaha, Neb., adding that the United States has “not sold one additional bushel of grain” because of the war.
Mike O’Dea, risk management consultant, StoneX, agreed, saying “There is a lot of fatigue from Black Sea headlines. Everyone assumes Russia will keep shipping wheat.”
US wheat faces uphill battle
For the US wheat market, the story is plenty of protein in hard winter wheat, an outstanding (and large) soft winter crop, shrinking spring wheat production and limited export opportunities.
The strong value of the US dollar trading around one-month highs was negative for all grain exports as it tends to make US commodities higher priced relative to other countries.
The strong value of the US dollar trading around one-month highs was negative for all grain exports as it tends to make US commodities higher priced relative to other countries, and especially for wheat as the lower value of the Russian ruble encourages dollar-based wheat exports.
The USDA forecast 2023 US wheat production at 1.734 billion bushels, down just 5 million bushels from the July forecast but up 84 million bushels, or 5%, from 1.65 billion bushels in 2022 and slightly below the average of analysts’ estimates of 1.739 billion bushels in a Reuters poll.
Production of winter wheat, for which harvest is nearly complete, was forecast at 1.227 billion bushels, up 2% from July and up 11% from 2022. Forecasts are hard red winter wheat production at 585 million bushels, up 1% from July, soft red winter wheat at 440 million bushels, up 4%, and white winter wheat at 202 million bushels, down 2%. Compared with a year ago, hard red winter production was up 10%, soft red winter was up 31%, and white winter was down 15%. Production of spring wheat other than durum was forecast at 460 million bushels, down 6% from July and down 7% from 2022, including hard red spring at 413 million bushels, down 7% from 2022, and white spring at 37 million bushels, up 1.9%. USDA estimates were above the average of trade expectations for all winter wheat, hard red winter and soft red winter but were below for white winter and spring wheat other than durum.
“We should see more swapping out of spring wheat into hard red winter,” Lapp said. He noted the high average protein of the hard red winter crop and the recent 75¢-a-bushel premium of Minneapolis wheat futures to KC futures. The futures premium of Minneapolis over KC was between 55¢ and 62¢ in mid-August, while the cash basis was around 85¢ a bushel on 14% wheat in both markets. The Minneapolis basis has shown some weakness, as may be expected with spring wheat harvest progressing, while the KC basis firmed slightly after a steady decline earlier in the hard red winter harvest period. The KC basis on high protein hard red winter was at only a small premium to low protein hard red winter, illustrating the high average protein of the 2023 crop.
O’Dea said mills were “kicking spring wheat out, using more hard winter wheat and using as much soft wheat as they can” in wheat flour blends.
Harvest of the US winter wheat crop was winding down with 92% of the crop in the 18 major states combined as of Aug. 13, in line with the five-year average, the USDA said in its Crop Progress report. All states were 90% to 100% harvested except Idaho at 49% and Montana and Washington both at 70%. The spring wheat harvest was 24% complete as of Aug. 13, slightly behind 28% as the five-year average, with progress lagging in five of the six producing states.
US Wheat Associates in its Aug. 11 harvest update said, based on 320 of an expected 520 samples, 2023 hard red winter wheat was averaging 12.9% in protein (versus 13% in 2022 and 11.6% as the five-year average) and was graded No. 2 hard red winter wheat compared with No. 1 both last year and as the average. Testing of the soft red winter wheat crop was complete, with an average protein of 9.2% compared with 9.7% last year and 9.5% as the five-year average. The crop graded No. 1 soft red winter, the same as last year but higher than the five-year average of No. 2. Anecdotal reports during harvest tagged the soft red winter crop as one of the best ever. With the spring wheat harvest still in its early stages, not enough samples had yet been tested to provide an accurate evaluation of the 2023 crop.
In the WASDE report, the most significant change from July was a 25-million-bushel reduction in 2023-24 exports, forecast at 700 million bushels, the lowest in 52 years. Carryover on June 1, 2024, was forecast at 615 million bushels, up 23 million bushels from July as a 5-million-bushel decline in production partially was offset by a 3-million-bushel reduction in food use of wheat, trimming only 2 million bushels from the loss of exports. Feed and residual use of wheat was unchanged from July at 90 million bushels, which “will be pretty difficult to get to,” Mr. Lapp said. Feed and residual use was 90 million bushels last year but only 64 million in 2021-22.
US wheat exports remain a challenge primarily because of strong exports of lower-priced wheat from Russia.
“The pace of exports to date has been pretty godawful,” Lapp said. “We could have further reductions in exports.”
The recent sharp downturn in wheat futures has provided opportunities for flour buyers.
“Greed is not the best option this year,” Lapp said of buyers who may be waiting for still lower prices.
O’Dea said he thought the USDA’s wheat-by-class estimates were “pretty good,” with the drop in hard red spring wheat and the increase in hard red winter “fitting with the KC/Minneapolis spread.” He saw the USDA’s global wheat estimates as “more interesting,” noting lower carryover in some major exporting countries. He said 2023-24 global wheat production could be lower than the USDA’s forecast of 793.37 million tonnes (down 3.3 million tonnes from July but up 3.4 million tonnes from 2022-23) by major exporters, noting weather issues in Canada, quality issues in Europe and India’s need to import wheat, among others.
“Durum is a train wreck,” O’Dea said.
The USDA forecast US 2023 durum production at 57.4 million bushels, up 6% from July but down 10% from 2022. Dry weather has challenged durum production in Canada, a major source for the US and global markets. Durum areas in Mexico, also a source of US imports, have received ample rainfall, and farmers may opt to plant corn.
“It’s hard to get a handle on durum,” he said. “But the market has to keep moving higher.”
US competes with Brazil
A better-than-expected US corn crop, in both size and quality, along with steep export competition from a record-breaking Brazilian corn crop and troubling global economic news, has pulled US corn futures prices down to their lowest levels since December 2020.
In just over a month’s time, the December corn future price dropped 24% from $6.28¾ a bushel on June 21 to $4.75½ a bushel on Aug. 15. And analysts expect prices may ease further as the end of the current marketing year approaches. Even the lower-than-expected production estimate in the Crop Production report released by the USDA on Aug. 11 was not enough to boost prices.
The USDA forecast US 2023 corn production at 15.111 billion bushels in its first survey-based outlook for the season, up 10% from 2022 and the second highest on record if realized. The USDA estimate fell short of the average pre-report trade expectation of 15.135 billion bushels. In its WASDE report, the USDA forecast the carryover of corn on Sept. 1, 2024, at 2.202 billion bushels, down 60 million bushels from the July forecast but up 745 million bushels, or 51%, from 1.457 billion bushels on Sept. 1, 2023.
“We’ve spent 90 to 100 days worrying about the crop, and now when it comes down to the final minutes, we’re finding out that a lack of export demand is really the thing that’s in charge here,” Lapp said. “We’ve got the lowest corn sales in four years, and we’re finishing out the year slow, so the lack of export demand has really put an anchor on prices it appears.”
Arlan Suderman, chief commodities economist for StoneX, added, “The USDA has cut the old crop export target by 775 million bushels over the past year for the 2022-23 marketing year, but we’re still not shipping enough to hit that target before the year ends on Aug. 31.”
The record corn crop in Brazil has been steadily siphoning away export business from the United States. The USDA in its Aug. 11 WASDE estimated 2022-23 corn production in Brazil at 135 million tonnes, up 19 million tonnes, or 16%, from the prior year.
“It’s like Russian wheat,” said Brian Harris, executive director and owner of Global Risk Management. “South America has been dominating the corn market, but that’s starting to get skinny since they’re about 85% harvested and some business may start to come back to the United States once they’re out. It won’t be huge, but it will be enough to keep the market from going back down to $4 a bushel.”
The record corn crop in Brazil has been steadily siphoning away export business from the United States.
And while export opportunities are not expected to achieve prior levels, there are indications business may pick up. Despite the saber rattling after Mexico’s President Andres Manuel Lopez Obrador issued a presidential decree on Jan. 1, 2021, seeking to ban genetically modified corn by 2024, which would significantly impact the approximately 17 million tonnes of GM corn imported into Mexico from the United States, the country routinely has been buying substantial amounts of US corn for both the current and 2023-24 marketing years. Since June, the USDA’s 24-hour Foreign Agricultural Service reporting system has indicated several flash sales totaling more than 565,000 tonnes of corn for delivery to Mexico.
Domestic demand for US corn supplies, however, may remain soft, which is expected to weigh on prices. Livestock producers have been reducing herd sizes for several years due to high feed prices, and analysts project the current feed usage allotment may continue to contract. Also pressuring corn prices are the robust ending stocks.
“In the past couple of years, the United States has been struggling to get anywhere near one and half billion bushels ending stocks, but this year it looks pretty certain we’re going to be above 2.2 billion bushels, and that would dictate corn prices don’t need to be up where they’ve traded before near $6.50 and $7 a bushel,” Harris said.
What happens if Black Sea grain corridor deal is not extended?
“We’ve got a stocks-to-use ratio for corn at 15.9%, which is the largest stocks-to-use since 2005-06,” Lapp said. “Even with the projected increase in usage, it’s still a stock-building year.”
With about a month remaining before harvest, the outlook for the 2023 US soybean crop remains ill defined. As of Aug. 13, the USDA said 78% of the US soybean crop in the 18 major growing states had set pods, and the weather between now and harvest will be a major factor in determining the crop’s final yield number.
“The weather has been good for the first two weeks of August, but then it’s going to start to turn hot, so we really don’t know what the yield is going to be like,” Lapp said.
In its August Crop Production report, the USDA pegged this year’s soybean production at 4.205 billion bushels, down about 95 million bushels, or 2.2%, from its July outlook, and down about 1.7% from 4.276 billion bushels produced in 2022. The latest yield projection by the USDA was 50.9 bushels per acre, up 2.8% from 49.5 bushels per acre in 2022. The average pre-report production expectation was 4.246 billion bushels with an average yield of 51.3 bushels per acre.
Many analysts, however, were concerned about the sharp reduction in next year’s carryover. In the Aug. 11 WASDE report, the USDA forecast the carryover of US soybeans on Sept. 1, 2024, at 245 million bushels, down 18% from its July outlook of 300 million bushels and down nearly 6% from the current year’s carryover estimate of 260 million bushels.
Unlike corn, soybeans have stronger domestic demand thanks to the United States’ renewable fuel program.
“That ending stocks number of 245 million bus is the lowest since 2015-16, so it will likely prevent any major freefall in prices,” Harris said.
Unlike corn, soybeans have stronger domestic demand thanks to the United States’ renewable fuel program. In its Aug. 11 WASDE, the USDA projected 12.5 billion pounds of soybean oil for biofuel usage in 2023-24, up almost 7% from 2022-23 and up 21% from 2021-22. Some analysts expect next year’s biofuel usage projection to edge closer to 12.8 billion pounds in future reports.
But like corn, US soybean exports have withered in the shadow of Brazil’s mammoth crop. In addition to its record-breaking corn crop, Brazil had record 2022-23 soybean production.
“We have a real problem because the big crop they produced in Brazil this last year, they’re still shipping,” Suderman said. “October is typically our biggest export month of the year for soybeans, and we usually own that time period because Brazil is out of soybeans, but they still have a lot of soybeans on hand, and new crop sales have only been a small portion of what they normally are this time of year.”
The USDA forecast 2023-24 US soybean exports at 1.825 billion bushels, down 25 million bushels from the July forecast and down 155 million bushels, or 8%, from 2022-23.
Weather will become less of a factor as the spring wheat harvest advances and the corn and soybean growing seasons wind down and harvest (already underway in southern states) approaches. Then attention will turn to winter wheat planting and Southern Hemisphere crops with a constant watch on developments in the Black Sea region.
