General Overview: We continue to focus on the Grains and Oilseed complex for the present Agri-Commodities Update, and our next publication will be in March 2022. In the context of the WASDE report of last Wednesday (Jan 12), which was not as eventful as many had anticipated for the final data in connection with the 2021 U.S. production season, the market participants are focused on South American production anticipations, on the wheat harvest progress in Argentina, and on global trade. As we have said for some time, farm prices remain at multi-year highs in the U.S. across the grains and oilseeds complex.
While the commodities prices are sustained, input inflation and food inflation are going to be present for some time. This projection comes from agri-commodities traders and to the anticipations of the large public food companies that already released their FHE11/2021 results (General Mills and Conagra) and before the full swing of annual corporate reporting later in Jan and Feb. The elevated cost inflation for farmer inputs and food price inflation for consumers will continue to impact the conditions and the profitability of grains and oilseeds trading for some time. Inflation, compounded with stretched labor availability and with Covid-strained logistics in the U.S., as well as in many countries, will have a consequence on a number of agribusiness and food companies’ profitability at least in 2022.
As a big picture, the current market and supply chain conditions are tight with low U.S. ending stocks, in spite of the slight upward projections in the last WASDE report. It comes also in spite of excellent harvests for corn with record yields at 177 bu/acre, and for soybeans. The USDA soybean and corn production forecast in Brazil were lowered, confirming the recent South American production anticipations from Argentine and Brazilian agencies. Global trade information tends to point to supply chain stresses for most coarse grains and for wheat, confirmed by high wheat seeding reported in the U.S. by the USDA.
The USD came back from several-months high vs EUR, and EUR is trading just below USD1.1438 at the time of writing. The CAD recently appreciated in reaction to the recent USD softness, and USD is now trading again around CAD1.25, at levels last seen three months ago.
Corn: This week’s corn prices have been choppy after the WASDE report, following anticipation trending up last week, ending a nearly three-month price increase period of the commodity. As mentioned above, the USDA confirmed the 2020/21 season’s record crop, as per estimate of 15,115 million bu, probably just short of the historic corn crop of 2016. But lingering questions on the ethanol mandate in the U.S., high input prices, the conflicting news about Chinese demand, and the South American inclement weather may continue to bring volatility to reasonably high prices in the next two to three months.
Altogether, the future prices of corn remain at decent levels. While cash corn and nearer contracts are bearing the brunt of current volatility, the Sep 22 and Dec 22 corn contracts are fairly stable, of course with lower volumes. At the end of the week, Mar 22 corn closed at $5.96/bu, nicely coming back following a $5.85/bu day low this Friday and not too far from late Dec highs of $6.15/bu.
Soybeans: Soybeans prices significantly increased since the Dec WASDE report and from the Nov 2021 bottom of $12/bu, as the Mar 22 contract reached $14/bu earlier this week on the back of South American weather news and crop conditions. The ending stocks numbers projected for the U.S. were upgraded to 350 million bu for 2020/21, and production was flat at 4,435 million bu, the second-highest soybean crop on record. This shows that the soybean balance sheet is not as ample as some anticipated.
The Mar 22 contract finally set at $13.69 /bu at today’s close. The soybean prices forward curve is slightly backwardated and shows a very flat pattern at elevated levels for the next two marketing years.
Wheat: The last WASDE report painted an increasingly complicated picture for wheat in our view, though many said it was bearish. And looking at slightly tighter ending global stocks, the U.S. balance sheet does not look great. The U.S. ending stocks estimate for all wheat classes at the end of the 2021/22 marketing year now totals 628 million bu compared to 845 million bu at the end of the 2020/21 marketing year (which was already -18% vs 2019/20). This is the smallest wheat carryover since 2008. Although sharply down in the past couple of days, winter wheat prices remain reasonably high in spite of projected record new crops in Argentina and Australia, which are counter-balanced by lower exports from Black Sea ports and from the U.S., as well as by sustained demand from the Middle East and Africa. So overall, volatility at elevated prices may be a feature of the wheat market for some time.
Chicago wheat futures curve shows a plateau for this marketing year and the subsequent one with a slight backwardation shape. The Chicago wheat Mar 22 and Jul 22 contracts, respectively, closed the week at $7.41/bu and $7.37/bu and Kansas City wheat Mar 22 closed at $7.45/bu, all down from recent highs and off about 50 cents/bu in the past three days.
Sources: Bloomberg, BNP Paribas Global Markets, USDA, CME, WSJ, Financial Times, University of Illinois, Food Business News
GENERAL DISCLAIMER
This document was prepared by Agribusiness & Food officers from Bank of the West. Bank of the West is part of the BNP Paribas group of companies. Facts and opinions expressed herein are based on a variety of sources which the author believes to be reliable, however we make no representation as to the accuracy and completeness of such information and Bank of the West does not accept any liability in this respect. The discussions and information contained in this document are the opinions of the author as of publication date and should not be construed or used as a specific recommendation for the investment of assets. None of this material is intended as an offer, or a solicitation of an offer, to purchase or sell any commodity, security or financial instrument. Nor does the information constitute advice or an expression of the Bank’s view as to whether a particular commodity, security or financial instrument is appropriate for you or meets your financial objectives. This material and its content are for information and discussion purposes only. Economic and market observations and forecasts, such as those discussed in this commentary reflect subjective judgments and assumptions, and unexpected events may occur. There can be no assurance that developments will transpire as forecasted. Nothing in this document should be interpreted to state or imply that past results are an indication of future performance. Any price information included in these materials are for information purposes only, are typically sourced from the exchange where the instruments trade and are subject to change without notice.