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Ukraine War, South American Weather Feed Volatility

Wednesday, March 30, 2022
filed under: Marketing/Risk Management

By Mike Krueger*
        It’s been a period in world markets that we’ve never witnessed as the trade tries to understand what’s happening and what might happen next.  Much smaller than expected South American production and now the war in Ukraine have combined to create a volatile mixture.
        The talk has finally started to think beyond tomorrow.  World supplies of corn, wheat and even soybeans have been declining for the past several years despite what you’ve been reading.  Record world crop production for six or seven consecutive years masked increasing demand.  We read about demand destruction because of high prices and demand weakness because of economic slowdowns and demand slowing because of Covid.
        On these pages are charts of world corn, wheat and oil sunflower consumption. There have been a few periods of slowed growth in consumption, sometimes caused by price relationships between wheat and corn in feed channels; but actual reductions in demand are rare.
        World oilseed prices were the first markets to explode higher because of the weather problems in South America.  The growing season across southern Brazil, Paraguay and Argentina was a classic La Niña pattern: warm and dry.  That pattern remains in place, especially across Argentina.  The result of this La Niña pattern was that soybean production in South America is down more than a billion bushels, according to the USDA. Other analytical groups have soybean production down nearly 1.5 billion bushels from early forecasts.
        This is an incredible drop. The world oilseed situation was supposed to be bearish, based on increasing ending supplies in the U.S. and record production in South America.  All of that has now changed.  U.S. soybean exports should now be much larger than expected and ending supplies smaller.  The USDA, in its March WASDE report, increased U.S. soybean exports by only 40 million bushels while at the same time forecasting Brazil production down a billion bushels.  Something doesn’t make sense.
world corn consumption chart        The world corn market faces a similar predicament.  Brazil had a bad corn crop last year that is limiting their exports. It now seems like Brazil’s 2022 corn crop will also be smaller than expected, but not as poor as last year.  Argentina’s corn crop, however, could be much smaller than last year if the weather stays dry. 
        The real problem now is that the war between Russia and Ukraine has shifted the bullish emphasis from soybeans to wheat and corn and sunflower. Russia is the world’s largest exporter of wheat.  Ukraine is the world’s fourth largest exporter of corn (just behind Argentina) and is a significant exporter of a number of other crops, including wheat and barley. wheat consumption chart
        When it comes to exports of sunflower oil, Ukraine has been the world leader in recent years, accounting for nearly 5.3 million metric tons in 2020/21.  Russia is the second leading sun oil exporters, totaling about 3.3 MMT this past year.  Initial projections — coming out prior to the February outbreak of war in Ukraine — forecast that country’s 2021/22 sunflower oil exports at nearly 6.7 MMT.  Between them, those two neighboring countries accounted for about 75% of world sunflower oil exports in 2020/21.
        Exports from Ukraine and Russia have nearly come to a halt.  A protracted conflict in the Black Sea will threaten a significant portion of the world’s exportable wheat, corn and sunflower supplies.  This would, in turn, necessarily push significant export business for these crops to the U.S.
world SF oil consumption chart        An even more important market concern going forward will be whether Ukraine’s farmers will be able to get spring crops planted and if their supply chains will allow adequate shipments of fuel, fertilizer, etc.  Some analysts are already talking about a 40% or more reduction in corn acres in Ukraine because of the conflict.  No one knows today what the long-term implications of this situation might be.
        There also are other weather considerations that could have bullish implications.  The U.S. Southern Plains hard red winter wheat region continues to suffer from a significant and expanding drought.  This crop has broken dormancy. It needs rain soon to prevent a significant yield decline.  Some crops people are already suggesting at least a 30% drop in yields across this region.  The Southern Plains accounts for about 80% of the total hard red winter wheat production in the U.S.  The drought across the U.S. Northern Plains and western Canada is also still lingering as the spring planting season is fast approaching.
        All of this will put major emphasis on Northern Hemisphere crop production. No crop can afford to give up or lose acres this spring.  The March 31st USDA Planting Intentions estimates will be a key market factor.  Most guesses throughout the winter were expecting a slight reduction in corn acres and a slight increase in soybean acres.  Spring wheat acres were expected to decline, but that was before the Black Sea situation pushed wheat prices as much as $3.00/bu higher in a two-week period.
sf export table        Minor crops are also begging for acres. The oil sunflower situation is a case in point. The world’s sunflower oil buyers are in serious trouble if Russia doesn’t export sunflower oil.  Sunflower buyers have already indicated they will do everything possible to at least hold North American sunflower acres steady from last year.
        Markets are used to dealing with the vagaries of weather and supply and demand uncertainties.  Markets don’t know how to deal with geo-political events of the magnitude of what’s happening in the Black Sea region.  That’s what is causing the extreme price volatility.  That is also why this price volatility is likely to continue until some resolution to the Russia/Ukraine conflict occurs.
        It is also important to remember that world ending supplies of wheat and corn are not as big as they appear on paper. The USDA says China holds 65% of the world’s corn surplus stocks and 50% of the world's wheat surplus stocks.  China is an increasingly larger importer of both. The Chinese will not export wheat or corn, and few analysts believe those surplus stocks exist; or, if they do exist, they are poor quality.  
         * 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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