Wheat market volatility continues (Grain Marketing)
(Editor’s note: Rob Davis is a professional grain marketing analyst.)
The May USDA crop report was released last Thursday, with most numbers relatively close to analyst predictions, showing tight U.S. and world grain stocks. The USDA has lowered U.S. production due to planting delays caused by wet and cold weather across the Midwest, North Dakota and Minnesota. The USDA reduced its national average yield estimate from 181 bushels per acre to 177.
On May 12, the July 2022 corn contract closed at $7.91 1/2 with December 2022 closing at $7.35 1/4. The market is beginning to move focus from the old crop to the December contract, which could mean that the spread between July and December will tighten from minus-35, closer to zero. The complete opposite could happen if we get into drought conditions over the next two months. A drought in the Midwest this summer could put corn in the $10 neighborhood.
On May 12, the July 2022 soybean contract closed at $16.13 3/4 with the November 2022 contract at $14.80 1/2. Analysts believe that USDA is not properly reflecting how tight soybean supplies are currently. With a crush margin over $2, the amount of profit that soybean crushers can make is limited only by the amount of bushels that they can buy and process. The strength in the energy market continues to keep price pressure on soy oil, keeping margins wide.
Analysts also believe that the USDA is behind the curve on the amount of soybean exports for the year, with continued strong demand from China trying to replace the Brazilian production shortfall.
The old crop carryout was lowered to 235 million bushels, which was not the 225 that analysts were expecting.
The USDA left the yield estimate from the February report constant at 51.5 bushels per acre.
On May 12, the July 2022 wheat contract closed at $11.78 ¾ and the July 2023 wheat contract closed at $11.06 1/4, which is a new contract high. All US wheat production was expected to come down to 1.24 billion bushels. The USDA reduced estimates well below the trade guess to 1.173 billion bushels.
The wheat market strength is created by the widespread supply uncertainty. The fact that Russia is the largest wheat exporter and is working to disrupt Ukraine’s ability to export their crop is still the main concern. Despite massive reductions in Ukraine’s grain exports, traders are still concerned that current estimates are still not realistic.
Adding fuel to the fire are the poor growing conditions around the world. Many wheat producing countries have drought conditions, including the United States. The wheat market will remain extremely volatile for the foreseeable future. On a local level, the normal basis will remain under pressure as a combination of high prices and an increase in acres means that local buyers probably won’t be working that hard to find bushels.
Local corn basis is under serious pressure as well, both old crop and new. Generally speaking, yields were decent here on Delmarva and the corn crop in Pennsylvania and New Jersey were some of the yields that farmers have seen there. Multiple grain buyers have told me that they have never seen a corn market like this in their careers. The basis in Pennsylvania is negative, which has not happened during this time of the year. This basis weakness has more bushels flowing to the poultry companies on Delmarva and pressuring the basis here as well.
There are rumors of some corn actually being exported on barge in significant volume, which would be completely opposite of the usual flow of corn here on Delmarva.
(Editor’s note: Rob Davis spent 12 years in the finance industry as a portfolio manager and three years as a grain merchandiser and market analyst, currently farming on the Delmarva Peninsula, raising grain and poultry. Davis can be reached by e-mail at Rob@RichLevels.com.)