December was a fitting end for a year in which none of the major agricultural contracts – corn, wheat, or soybeans – ended more than 5% higher or lower than a year ago. The corn market was particularly quiet with only a 14-cent trading range for the month and a settlement price almost identical to a year ago.
The domestic fundamentals of the corn market are mixed, with the ethanol grind exceeding expectations and exports lagging significantly. The weekly use of corn for ethanol is on a record pace and should exceed USDA estimates by more than 75 million bushels. Exports, on the other hand are 40% behind a year ago. The one encouraging note is that we’ve entered a two- to three-month window where U.S. corn is the cheapest in the world to most destinations.
The international fundamentals are far more interesting, with the two most important developments being the Brazilian corn crop and Chinese domestic prices. In Brazil, estimates of the summer and safrinha crops have both fallen on reduced acres. In Central Mato Grosso prices have fallen as low as $2 per bushel and are below variable cost. This will discourage safrinha planting February to April.
Summer acres were also down on a larger than expected switch to soybeans. Private crop estimates now range from 83-91 million metric tons (MMT) versus USDA’s December estimate of 95 MMT.
In China the impact of the expansion of industrial corn use is already being felt. Despite the auction and net liquidation of 45 MMT of government corn stocks, domestic prices continue to rise. As a result, their imports of barley and sorghum are surging. World prices for those commodities have moved far above the price of corn, which is generally restricted from moving into China. The high price of barley is creating more demand for feed wheat, which has helped support wheat prices in general.
One unexpected origin to benefit from feed wheat business was Toledo, Ohio. U.S. wheat exports have been hurt over the past few years by our exceptionally high cash basis. The CME VSR mechanism has widened calendar spreads to the point where the single best use for the commodity is to store it. Interestingly, one of the Toledo warehouses left their receipts “on the street” well into December despite a 26-27 cent carry from December to March futures. This wheat quickly became the cheapest wheat in the world and an extended Great Lakes shipping season allowed an exporter to complete the trade.
That anomaly notwithstanding, the dominant price setter for soft wheat remains Russia. The price for 12.5% protein Russian wheat held perfectly steady the entire month between $191 to $192. [As an encouraging side note, the CME Black Sea wheat contract opened this month and several large trades were executed. This will allow for broader participation in this important market.] Those prices held steady despite updated estimates for the Agricultural Ministry that their crop was 85.8 MMT and their comments that exports could reach 40 MMT. That compares with last year’s record exports of 27.8 MMT.
The largest area of uncertainty in the world wheat market remains India. The India Food Corp. has pegged their crop at 103.3 MMT, 5% above last year’s record. At the same time, private analysts estimated that planted area would be 3-6% below last year. As always, the monsoon will be the primary determining factor for production, but for now we have a 10 MMT difference of opinion.