Ukraine, Dry Weather & Renewable Diesel Surge
Wednesday, August 31, 2022
filed under: Marketing/Risk Management
By Mike Krueger*
It’s been a summer of extreme volatility in the markets as a combination of factors never before witnessed occurred at one time. Some of those factors are:
• Drought-reduced soybean crops in South America started the major market rally.
• The outbreak of the Russia/Ukraine war took markets to new highs. Ukraine is the fourth largest world corn exporter and a significant wheat exporter. Russia and Ukraine combined comprise 60% of the world’s sunflower oil exports.
• The very late planting season across the Northern Plains and western Canada aggravated the situation.
• U.S. hard red winter wheat production was reduced by drought.
• Equity markets collapsed under the weight of interest rates doubling, rising energy prices, concerns over the war in the Black Sea and worries about economic growth slowing. And don’t forget that inflation in the U.S. was approaching 10%.
All in all it became a “risk off” market mentality that spilled over into agricultural commodities in early summer. Commodity prices also crashed as speculative trading funds exited large long positions. This also created a bearish technical picture, and the break in prices continued despite relatively strong fundamentals.
The accompanying chart is November soybean futures. They traded as high as $15.85 in late June and below $13.00 in early August before rallying more than $2.00 in one week. That was the biggest one-week rally in history. Other markets have been similarly volatile.
Weather and crop production around the world has been below expectations, except in Russia where a record wheat crop is expected. A tough drought across western Europe, especially in France, has cut into their expected corn production in a major way. The USDA reduced the EU corn crop from 68 million metric tons (MMT)? in July to 60 MMT in August. Some analysts have it closer to 50 MMT. That is a borderline disaster and should mean EU corn imports will be well above historical levels. Crop production in Germany and England has also been impacted by dry weather.
Australia’s wheat crop is off to another great start. The USDA raised their production estimate in the August WASDE. India’s wheat crop was hurt by late-season hot, dry weather. That cut into yields and potential wheat exports from India. India implemented a 40% wheat export tax.
The big question mark remains what happens in Ukraine? Crop production there will be better than originally expected, although still well below normal. The August USDA WASDE estimates Ukraine corn production at 30 MMT compared to 42 last year. Corn exports are estimated to drop from 24 MMT to 12.5. Ukrainian wheat production is forecast at 19.5 MMT compared to 33 last year. Exports are forecast to drop from 18 MMT to 11. Shipments from Odessa resumed in mid-August, but in a very small way. The export potential from Ukraine is likely overstated. There are still big logistical problems getting crops to port or rail facilities. No one is certain of the extent of the damage to infrastructure as the war continues. Russia could effectively stop exports from Ukraine if and when they might choose to do so.
What happens next will boil down to U.S. corn and soybean yields. The USDA trimmed the corn yield and increased the soybean yield to a new record high in their August WASDE report. It has been a hot and dry summer across much of the western Corn Belt. The eastern Corn Belt has had more-favorable weather. The trade was generally expecting a reduction in the soybean yield, not an increase. The small reduction in the corn yield was expected.
Weekly corn and soybean conditions have slipped slightly lower in nearly every weekly report. September USDA reports will include corn and soybean yield estimates based on a more-thorough analysis, including computer models, farmer surveys, objective test plots, etc.
Northern Plains crops, including sunflower, spring wheat, corn, soybeans, etc., look good. The spring wheat yield could approach the previous record, although combines were just starting to roll as of this writing.
The USDA conducted a special survey of planted acres across the Dakotas and Minnesota in July because of the late planting season and released the results in the August WASDE. Only very minor adjustments were made from the March planting intentions estimates. High prices encouraged farmers to plant rather than take Prevent Plant insurance.
U.S. corn and wheat ending supplies are now forecast to drop slightly from last year. Soybean ending supplies are forecast to increase just slightly. Final yields and export levels will determine the direction of ending supplies. Markets will be sensitive to both, and volatility will continue — although it shouldn’t be as crazy as what we saw throughout the summer, unless weather troubles occur again in South America.
There is another longer-term bullish factor lurking behind oilseeds markets. That is the expected surge in renewable diesel production. Renewable diesel is made entirely from vegetable oil. It contains no petroleum. Consumption of vegetable oils in renewable diesel is projected to increase eight-fold in just the next six to seven years. That will consume every drop of surplus vegetable oil if it happens. Significant investments in new and expanded soybean processing plants in the U.S. and canola crushing plants in Canada are already underway.
Some analysts estimate this “new” demand for vegetable oil will require an additional 20 to 25 million acres of soybeans and 20% more canola production. Those are huge numbers. Sunflower and canola should be the biggest beneficiaries of renewable diesel because they are high-oil crops.
* 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.