May appears to have been a watershed month for grains. Wheat started the month with two major concerns: a drought in the southern plains of the U.S. and the Russian army massing along its country’s border with Ukraine.
Fortunately, both of those problems peaked during the first week of the month and wheat (CBOT:ZWN14) markets around the world spent the next three weeks wringing all of the risk premium out of their prices. Most key wheat markets are $0.80 - $1.00/bushel lower than they were in early May.
For the corn (CBOT:ZCN14) market the May watershed was all about water. In April and early-May most of the central U.S. received far above normal rainfall. The delayed planting quickly brought back memories of last year when nearly 11 million acres didn’t get planted because of excess rain. Much like wheat, the situation for corn improved just in time. Even the northern tier of states made huge progress in planting just before the financially punitive ‘prevent plant’ dates started to reduce their crop revenue insurance coverage.
Unlike the grains, soybeans have yet to experience their spring watershed. However, we believe the watershed moment for soybeans (CBOT:SNN14) is fast-approaching. Soybean’s price relationship to grains has been exceptionally high for an extended period of time, and we are seeing an appropriate acreage response around the globe. Not only is the U.S. planting five million more soybean acres than it has ever planted, but soybeans have also taken land away from grains in both Canada and China this spring.
In South America all major producing countries set a new acreage record every year. Even with the significant breaks in corn and wheat, soybeans were able to end the month nearly unchanged because of two key factors: the tightness in the U.S. old crop, (a record low carryout), and the onset of good seasonal buying of new crop by China.
For most of 2014, soybean meal has been the primary driver of soybean demand and price. The expiring May futures contracts reached the highest meal:oil ratio in history. The unexpectedly high crush rates in the U.S. are being driven by export meal business, and the latest round of new crop U.S. soybean sales is being driven by the high January 2015 soybean meal futures price in Dalian. Getting back to grains. Along with accelerated planting and good growing weather, there have been two other important factors weighing on those markets:
- In soft red wheat the lack of demand and the exit of the managed money crowd has pushed the nearby spreads out to a level that will trigger an increase in the CME’s storage charges for delivery grain. The cost of carry will soon be increased by 36 cents/bushel/year, and possibly more. With U.S. prices far above world prices all of the spread widening has occurred via a drop in the nearby price.
- In corn, China has for years been working to support their farmers via high domestic prices. This has created a situation where their interior price is $100/metric ton above the world price. This would normally make them a dumping ground for world feed grains, but they’ve attempted to block that flow with licensing requirements and GMO restrictions. Even with those efforts they find themselves lugging more than 40% of the world’s corn carryout. In this environment it’s very important to watch how the Chinese government is managing its inventories. They have recently started weekly auctions where they are selling millions of tons of corn, and there is no immediate plan for them to replace that grain. Also, as in wheat, the managed money crowd has been liquidating its long position in corn futures.
The managed money crowd has so far taken a different track with their soybean positions and they were, in fact, net buyers in the most recent report. All of that notwithstanding, we believe the current price relationship between soybeans and grains is unsustainable over time. Only asymmetrical weather in the U.S. would allow the current ratio to persist. Asymmetrical weather is weather that is favorable for one crop and not for another. In this case that would mean a good July for corn pollination and a bad August for setting bean pods. It is far too early to predict either of those with any certainty, so we proceed with an assumption of normal weather.
In closing we note that an important piece of the price puzzle will be shown in the June 30 planting report. We believe that total ‘prevent plant’ acres in the U.S. will be a more normal 2.5-3.5 million acres. If that is correct then the total corn plus soybean acres are currently understated by at least a million acres. In our current price structure we believe that soybeans will be the primary beneficiary.