Rural Voice Market Commentary – January 2023

by: Scott Krakar

Grain prices are less than thrilling for growers currently.  As we moved through the fall harvest period and into winter, producer selling has been generally light.  Growers are disappointed with prices that seem to fade continually, with some major crops making new recent lows on the charts.  Unsurprisingly there is little farmer interest in selling with decreasing values.

Last spring, growers planted an expensive crop.  Crop inputs were high priced, coinciding with an expectation that grain prices would also be strong.  While prices were strong, many were expecting or hoping that grain prices would rally further, given the cost of production and various perceived production risks around the world.

A large concern that has been voiced all over the world, is the potential ramifications of the continuing Ukraine/Russian war.  Both nations are major producers of grain and both are key exporters likewise.  There are many nations of the world that depend on this bread basket region for their daily bread.  We remember the early outset of the conflict, fear reverberated in the grain markets, and prices roared higher.  Recall the exuberance of fear at the time:  Will Ukraine be able to plant?  Will the region be able to ship?  Many fears such as this brought strong buying interest from countless players and markets were elevated to extreme levels.  The market narrative was strongly one sided; and this narrative was widely discussed, convincing many that grain supplies were going to be jeopardized for an extended period to come.  But after enough time, market participants started to realize that the situation (from a grain growing/shipping perspective) wasn’t nearly as bad as once collectively worried.

Which brings us to today, with grain prices extremely weak relative to what was once widely expected.  The market sentiment has completely changed.  The former production worries have been dumbfounded.  The market is now focused on shipping performance realities, versus worse case imagined fears and worries, such as existed at the outset of the conflict.  The market became comfortable, even with the ongoing potential of an escalation in the region over time.  This lead to the realization that grain from the region is not only being produced in large scale quantities, but also that it is moving to market in an orderly and large volume trade.  Because of this demonstrated shipping capability, grain markets will continue to discount events in this conflict, keeping prices under pressure, until proven otherwise.

What else has been impactful to grain prices?  As we moved through the fall, grain market news was centered around South American production risks.  Prices rallied on poor growing conditions in the region, primarily affecting the earliest planted portion of the crop.  The growing crop in the field was suffering predominately from drought and high temperatures, although some regions also had issues arising from excess moisture as well.  Market watchers began to be concerned that a greater drought may have been forming.  A further drought would impact later planted crops also, that represent a larger portion of the total South American production.  South American production is very important to the world balance sheet and therefore markets took notice of the growing production risk.  As a consequence, soy prices rallied sharply as forecasts became more threatening.  Recognizing the potential losses in South America, and the potential delays in South American production coming to market, China began to enter the US market for old crop supplies, ensuring adequate product procurement for their domestic needs.  The combination of potential South American losses and increased demand created a strong increase in soy prices.

Strong prices remained until South American rains came.  The received rains came at a critical time for the majority of the crop.  With crop fears subsiding the prices also faded with more confidence in the stabilization of the growing crops.  While the South American crop is not yet made, the market is confident (at this time) that they will grow a sufficient crop to meet expected world demand.  At this stage of the production cycle yields are difficult to predict, but as long as there are sufficient rains the market assumption is that the yields will be there.  Currently grain prices point to this being the situation, as Brazilian beans are offered cheaper than US beans February forward.

Fund managers have taken notice of the sufficient grain inventories world wide and have been selling grain futures.  Fund managers continue to grow their net short (selling) positions as they see supply exceeding demand.  Currently the funds are short futures in all grain commodities, with the exception of soymeal.  It is rather rare for funds to be short soy futures, as they are today.  The last time the funds were short soys goes back to April 2020.  The funds position is very impactful to prices and this information tells us a story:  The grower doesn’t have lots of crop sold, choosing rather to store their grain.  This market structure gives the market little incentive to rally with the current production expectations worldwide.