By Karl Setzer

 

Volatility is starting to build in the U.S. cash grain market. 

Many buyers pulled their nearby bids when futures rallied in the beginning of March but are now back in the market for coverage. Farmers across the Corn Belt have been active sellers up to this point though and open bushels are quite low. Reports from across the country indicate many farmers have 10 percent or less of their old crop inventory left to price. This is now forcing some buyers to post incentives for deliveries and opening windows to extend old crop sales if needed. The next flush of remaining farm stored inventory will likely be after the planting season, and likely not until the U.S. crop potential can be better determined.

One way to measure market volatility is through Open Interest. Open Interest is a term that describes market involvement and the number of positions that are being held. The volume of Open Interest in the commodity market is starting to gain interest as it has been on a steady increase recently. The current level of Open Interest is nearly $1.5 trillion dollars, the highest it has been in more than 10 years, according to data from financial groups. Of this an estimated $225 billion is in ag commodities.

One number in today’s market that is starting to receive more attention in Brazil is the country’s corn yield. Sources in Brazil claim this year’s average corn yield in the country will be 102 bushel per acre. While Brazil has adopted several farming practices that will elevate yields, an increase in the use of GMO seeds will help considerably. As this yield per acre rises Brazil will apply more pressure to the U.S. market, even if plantings remain constant.

Much of the interest in Ukraine is on the spring crop planting progress, but the country also has a significant amount of its winter wheat crop yet to harvest. This is turning into a struggle as military actions are preventing fieldwork from happening. Low fuel supplies and concern over mines reportedly being placed in Ukraine fields are also hampering harvest activity. There are now thoughts Ukraine could lose 20 percent of its winter crop. Even so, this would still leave the country with a 26.4 million metric ton (mmt) wheat crop, which would be 3 percent larger than last year when drought devastated the country.

While the planting of spring crops in Ukraine is a major concern, infrastructure damages may have more of an impact on the country’s future export sales. Reports from the country indicate it will take at least six months to get Ukraine’s ports functional, but it is more likely it will take at least a year. This means even if Ukraine does get its crops planted in a timely manner it will struggle to get inventory moved. Ukraine also has a large volume of old crop inventory it still needs to move, mostly corn and wheat.

The United States’ ethanol industry is starting to see elevated export demand which is greatly needed. U.S. ethanol exports totaled just 23 million gallons in January but did rebound to 42 million gallons in February. Brazilian ethanol production is slowing which has been a source of competition for the United States in recent months. This build in demand is greatly needed by the ethanol industry as U.S. stocks have built to their highest level in the past two years.

Chinese hog production margins have greatly improved in recent weeks. This is mostly for summer months forward, with hog producers now able to lock in positive returns from August through the end of the calendar year. This gives trade the indication that the Chinese government has bought enough pork to stabilize the market. As a result, we may start to see China increase their feed grain imports as more hogs are likely to be raised as returns improve.

One of the biggest problems for the Chinese hog industry in recent months has been the low value of retail pork. Retail pork in China is currently just 46 percent of last year’s values, and 64 percent under two years ago. This return is starting to improve as well as the country recovers from African swine fever and COVID, both of which cut the country’s pork demand. These low retail pork values are also preventing Chinese imports, especially from the United States.

The most interest in the global hog market right now is on Brazil. Brazil is now forecast to produce 45.3 million tons of pork in 2022, a 1.8 percent increase from 2021. Better production facilities and larger hog counts are the leading reasons for the elevated output forecast. 

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