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Simply No Room for Production Problems

Thursday, March 30, 2023
filed under: Marketing/Risk Management

By Mike Krueger*
        Volatility continues to be the word in every market, including metals, equities, energy, grains, oilseeds, etc.  The general trend has been lower as the speculative trading funds have been liquidating long positions in corn and soybeans and increasing short positions in Chicago wheat futures.  The Black Sea war rumbles along into the second year with no visible end in sight.  The Ukraine “export corridor” remains open following a 60-day extension of the agreement in mid-March (although that hadn’t been confirmed as of this writing).
        Brazil’s soybean harvest is a bit behind schedule because of rainy weather across the central and northern areas.  The delay in the soybean harvest will also delay planting of some of the Safrinha crop (second-crop) corn.  Estimates of Brazil’s 2023 soybean production have slipped slightly, but most analysts are still looking for a record crop just above 150 million metric tons. One large Brazilian bank dropped its number to below 150 MMTs.
        Argentina, on the other hand, remains solidly in the grip of a severe drought that cut wheat production 50% last fall. Argentina’s soybean production is getting perilously close to 25 MMTs. A crop of more than 50 MMTs was the expectation when it was planted.  Argentina will have to import between 15 and 20 MMTs of soybeans from Brazil to supply its large crushing industry.  They will not be an exporter of soybeans.
        The Argentine corn crop is in similar condition.  It is likely they’ll also not be an exporter of corn.  Argentina is typically the world’s third largest corn exporter.
        Ukraine is the world’s fourth largest corn exporter.  Exportable supplies of corn from both countries in 2023 will be extremely limited.  Analysts are now forecasting that Ukraine’s farmers will plant 50% fewer corn acres than last year because of supply shortages of everything from fuel to seed to chemicals to labor.  It is now imperative that the EU and U.S. 2023 corn crops are big — or world corn supplies will get hard to find.
        The U.S. corn exports have been slow. USDA trimmed the export forecast by 75 million bushels in the March WASDE.  China did buy 1.5 to 2.0 MMTs (60 to 80 million bushels) in mid-March. 
        U.S. corn exports should increase significantly into the summer.  The problem is that U.S. corn supplies are relatively tight.  Domestic pipelines remain tight and basis levels high.  There are still very wide inverses in corn and soybean futures markets from old crop to new crop. One market analyst correctly noted that the large trading funds don’t care about inverses and tight cash markets.  They react more to technical signals and factors affecting other markets.  The March banking crisis was another reason for nervous funds to sell.
        The soy complex is similar to corn. Old-crop ending supplies in the U.S. are tight.  The forecast for the next marketing year also looks tight, even with the record 2023 soybean yield now forecast by the USDA.  Brazil has the supplies and China has the demand. The questions are:  how much will China import, and what percent of those imports will come from the U.S.?  China’s Covid lockdowns are over (for now), and their economic growth has been better than expected.
        And then we have wheat.  Russia has continued to export wheat to any and every market available at cheap prices. The war has yet to affect shipments from Russia.  Russia had an enormous wheat crop last year.  Australia and Canada did also.  We all complain about the low level of U.S. wheat exports, but the fact is U.S. wheat ending supplies will decline for the sixth consecutive year and have gotten tight. 
        The hard red winter wheat crop still hasn’t received any significant moisture. Crop conditions continue to deteriorate in Oklahoma and Kansas.  Poor stands and the possibility that sub-zero temperatures did some damage don’t bode well for average or bigger yields.
        There also was chatter that the heavy snow cover across the Northern Plains could mean late spring wheat planting. 
It is too early to worry about that, as we know how quickly the situation can change.  Western Canada, on the other hand, is very dry.  That can also change quickly.

        snow depth image

The accompanying image shows snow cover as of March 15, 2023.  Note that the snow ends at the North Dakota-Montana border and also that snow cover across western Canada is light.
        The world will start the 2023 Northern Hemisphere crop production season still on the razor’s edge in terms of supplies.  There is simply no room for any production problems ANYPLACE.  Supplies will be barely adequate with good crops. 
        The March 31 USDA planting intentions and quarterly stocks estimates will be important. Everyone is expecting two to three million more corn acres, steady soybean acres and more wheat acres.  Analysts will start building supply and demand scenarios for the coming marketing year based on these numbers. Like the USDA, initial yield projections will probably be at record levels
           * Mike Krueger founded The Money Farm, and is now a senior analyst with World Perspectives, a Washington, D.C.-based consulting company.  While the information in this article is believed to be reliable, marketing involves risk, and the author and The Sunflower assume no responsibility for its use.
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