MACRO-ECONOMICS PRESSURE GRAINS
The grains put in a tough performance the first week of March with all of the grains pushing lower. Wheat was the worst performer while soybeans posted smaller losses. Wheat lost ground 4 out of 5 sessions along with corn while soybeans posted losses in 3 out of the 5 sessions.
Early week pressure in wheat came from expectations that the Black Sea Export Initiative would be extended and that would allow for Ukraine and Russia to continue to dominate the world wheat export market. Light selling was also tied to reports of improving weather conditions in the US Southern Plains.
Corn was under pressure from the lack of direction. The Ag Outlook Forum’s acreage and stocks estimate has taken the wind out of the sails of the bulls as it appears that corn has its acreage bought and is in the position to just sit back and wait to see what mother nature brings us and where the actual acreage comes in. Corn was also pressured from reports that Mexico’s president was quoted saying Mexico will hold firm on halting imports of US GMO corn by 2024.
Soybeans traded with decent gains to start the week as the market tries to buy acreage. Light support continued to come from adverse weather conditions in South America, as both Brazil and Argentina have seen production estimates decline.
USDA’s March Crop Production report was a mixed bag for the grains. For wheat, most were surprised that USDA did not lower wheat exports. Wheat’s export marketing year is two-thirds over and sales are trailing behind. But USDA seems to be reluctant to lower wheat exports below the 775 million bushels level.
Corn’s March report was mixed as the US numbers were negative, but the world numbers gave hope. USDA did lower corn exports 75 million bushels. On the world stage, USDA trimmed Argentina’s production 7 million metric tons, putting production at 40 million metric tons. World stocks were increased due to cuts in US and Argentina exports.
The March Crop Production estimate was friendly soybeans. The net result was a 15 million bushel cut in ending stocks, now estimated at 210 million bushels. As was the case in corn, soybeans world estimates were also friendlier than expected as USDA trimmed Argentina’s production more than expected.
The week’s selloff had nothing to do with fundamental news but more to do with technical signals, which is being influenced by money flow. I guess the selloff should have been expected after listening to Fed Chairman Powell’s speak to Congress. He virtually said interest rates are going to continue to increase and if the indicators continue as they have, the hikes will exceed previous projections. Meaning it’s likely the Fed will increase rates 0.5% the third week of March.
The war in Ukraine continues to disrupt production. When the war first started the government was worried about running out of grain, but now as the war advancing and production estimates decline for Ukraine. Ukraine officials are projecting 2023’s wheat crop to be between 15 million metric tons to 18 million metric tons vs 20 million metric tons last year. This is about half of their normal production.
Looking at South American production, USDA left Brazil’s soybean production unchanged at 153.0 million metric tons (a record). CONAB is estimating Brazil’s soybean production at 151.4 million metric tons (vs 152.9 million metric tons previously). For Argentina, USDA is now estimating the crop at 33.0 million metric tons. Rosario is estimating Argentina’s soybean crop at 27.0 million metric tons (vs 34.5 million metric tons previously) and BAGE is at 29.0 million metric tons (vs 33.5 million metric tons previously).
The combined total production in South America is rapidly decreasing. At one point it was expected that the combined production for Brazil and Argentina would be 25.0 million metric tons above last year. Last year’s combined soybean production was at 173.4 million metric tons (Brazil: 129.5, Argentina: 43.9). Using the estimates above, this year the combined South American soybean production estimate is between USDA’s 186.0 million metric tons (Brazil: 153.0, Argentina: 33.0) and 178.4 million metric tons (Brazil 151.4, Argentina: 27.0). The low end of the estimates is only 5 million metric tons above last year. South America’s combined corn production estimate also looks to be below last year.
The other news that the market seems to be ignoring is weather, Not only has the market pulled all of the war premium out of the grains, but there is very little weather premium built in at this point as well. Winter just does not seem to want to let go of the Northern Plains. With another major blast expected this weekend, it will likely push the start of field work back to the middle of April, and that is if there is not significant flooding. I don’t expect a sharp rally in the short term, but the market will likely need to start buying acreage by April.
But the market is not focused on production or acreage numbers at this point. The market is paying close attention to macro-economics. It was interesting last week when all of the commodities were lower except soybean meal and gold. Well the reason for that performance was due to the lower production estimate out of Argentina as well as from reports of the Silicon Valley bank failure. And the likelihood that more banks could fail. To top that off, the jobs report last week was friendlier than expected, which had most thinking the Fed will increase interest rates 0.5% in next week’s meeting.
The grains were able to see a small dead cat bounce to start the second week of March, with most of the support coming from technical buying. The news of the second and third largest bank failures in the US hit the market hard as traders started to change their flow of money due to uncertainty. The trouble in the banking industry also fueled the rumor that the Fed might not be looking at increasing interest rates March 22. With the recent bank failures and expectations of more banks being in trouble, expectations are starting to lean toward the Fed holding off on rate increases.
Weather in the US is starting to become part of the headlines once again as spring approaches. Forecasts are calling for the Southern Plains to remain dry for the short term, which will likely result in further deterioration of the winter wheat crop. The recent reports of favorable weather in the Southern Plains have not resulted in an improvement in the winter wheat.
Monday afternoon’s state Crop Progress report showed the following: As of March 12, Colorado: 40% good/excellent, up 11% from the previous report. Kansas: 17% good/excellent, unchanged from the previous week. Oklahoma :30% good/excellent down 9% from the previous week. Texas: 17% good/excellent down 2% from the previous week.
Cattle traded mixed the first full week of March. Live cattle lost ground while feeder cattle rallied higher. Economic concerns pressured the live cattle market. News of two banks failing last week in the US hit the live cattle hard as did the lack of a cash trade. With the bank failure, traders are worried more economic issues will arise, which could result in a downturn in demand.
Feeder cattle traded in the opposite direction of live cattle. Feeder cattle pushed higher with support coming from the lower grain complex. Feedlot demand remains strong as well, which is helping the feeder cattle. Cattle prices are holding up at the high end of their recent trading range and are offering very attractive hedging levels.