War & Weather Translate Into Ongoing Market Volatility
Thursday, August 24, 2023
filed under: Marketing/Risk Management
By Mike Krueger*
If you like plenty of market volatility, sometimes irrational volatility, the past several months have provided more than you could hope for, as exemplified by the November soy oil futures of recent months.
War and Weather. These two words sum up the cause of the extreme price moves from day to day and week to week. Sometimes from hour to hour. The Black Sea war has been the price focus now for more than 18 months. There is still no end in sight. The bombing in midsummer shifted towards agricultural infrastructure in the Ukraine, with Russia attacking grain facilities at Ukraine’s major port of Odessa. They followed with strikes against rail and barge loading on the Danube River that separates Ukraine and Romania. Putin refused to renew the Black Sea Grain Initiative (BSGI) in July. That agreement had allowed for vessels to enter Ukrainian ports and load grain. No one yet knows when or if the BSGI will be renewed.
None of this “war” activity has been bullish enough to offset the better weather pattern that developed across the middle of the U.S. in mid-July. Weather went from hot and dry to cooler and wetter. Crop ratings for all crops have been the lowest since the summer of 2012. That was the year corn yields were a disaster. About 55% to 60% of the Corn Belt was classified in drought status in late July.
The question is whether the rain and cooler temperatures arrived soon enough to stabilize or improve yields. The market assumed that had happened, dropping precipitously in the last days of July and into early August.
In the meantime, there have been numerous other weather problems around the world:
• Northern Europe was very dry the first half of the summer and turned wet during their wheat harvest.
• Argentine was off to another dry start following last year’s disastrous drought that cut soybean, corn and wheat production in half.
• Western Canada has also suffered a very dry spring and summer. Durum production there will be off at least 30%, and durum prices have responded with big moves higher. Their spring wheat crop will also be 10-15% lower than expected, as will canola and sunflower.
• India’s wheat crop is smaller than expected.
We are shifting to an El Niño weather pattern following three consecutive years of La Niña. El Niño can mean hot and dry weather across Australia. It appears their winter crops will break dormancy in good shape. September and October are the key months for production.
Not all weather was problematic. Brazil harvested record corn and soybean crops and has been a super aggressive export of both. Russia’s wheat crop is smaller than last season’s record harvest, but still above average. Russia has been a seller of cheap wheat all year, and that will likely continue.
Oilseeds markets have been strong despite the record soybean crop in Brazil. China has been a more active buyer, including accelerating the pace of purchasing U.S. soybeans in early August. The world rapeseed crop will be smaller than expected a few months ago. The midsummer rain across the Northern U.S. Plains should boost sunflower yield potential. The USDA doesn’t provide a sunflower yield estimate until October.
The August USDA production estimates and WASDE (supply and demand) numbers didn’t change enough to make any difference to the markets. It was the first production estimate for corn and soybeans based on surveys. USDA reduced the corn yield from 177.5 bushels per acre in July to 175.1 bushels in August. They tinkered with demand numbers by reducing domestic use and exports slightly. Ending stocks dropped from 2.262 billion bushels to 2.202 billion. This is up from 1.457 billion bushels for 2022/23.
The soybean yield was reduced in the August WASDE?from 52 bushels per acre to 50.9 bushels. Soybean ending stocks for the 2023/24 marketing year were cut from 300 million bushels in the July report to 245 million bushels in August. This does tighten the soybean outlook enough so that any additional reduction in the yield or increase in domestic crush or exports will be bullish.
The tighter soybean outlook should also be reflected in firm sunflower prices. Western Canada has been in the midst of a significant drought most of the summer. Estimates of Canada’s wheat production are dropping. Rapeseed production has also been hurt by drought. That should also support sunflower prices.
The U.S. and world wheat outlooks are tightening. Smaller wheat crops in India, the EU, Argentina, Canada and Australia should eventually mean a better export outlook for U.S. wheat. The USDA, however, doesn’t see it that way. They reduced the U.S. wheat export forecast in the August report.
Finally, the demand for vegetable oil in renewable diesel production continues to expand rapidly. The USDA reports reflect some of this demand increase, but at a much slower pace than the industry is forecasting. Increasing demand for vegetable oil bodes well for high-oil crops like sunflower and canola. Renewable diesel is a big part of the demand for vegetable oil, but sustainable aviation fuel (SAF) is also starting to expand.
The only bearish aspect of these markets is the lack of any growth in export markets for soybeans, corn and wheat. Russia continues to sell wheat around the world at cheap prices. Brazil continues to supply China’s soybean and corn needs following its record 2023 crops. Lower production in some key areas in 2023 should eventually stimulate export demand from the U.S. Any significant reduction in Black Sea shipments will make it happen quickly.
* 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.