March is the opening season for farmers across the U.S. fertile plains and the critical growing regions in the Northern Hemisphere. Over the coming weeks, farmers will prepare the soil and plant seeds that will grow into the grains and oilseeds that feed, and increasingly power, the world.
Corn, wheat, and oilseed futures prices are moving into the planting season at the highest pre-2021/2022 levels in years. While the weather is always the primary factor driving prices, the ongoing war in Europe’s breadbasket and the critical logistical export hub at the Black Sea ports make the 2023 crop year particularly challenging. Grain and oilseed producers must produce bumper crops to compensate for war zone losses. Moreover, inflation has caused production costs to soar, putting even more upside pressure on agricultural products.
Grains and oilseed prices are at elevated levels
- Nearby May CBOT corn futures prices at $6.40 per bushel are at the highest pre-2022 February price since 2013.
- May CBOT soybean futures at $15.20 per bushel are at the highest pre-2022 February price in history.
- May CBOT soft red winter wheat prices at the $7.10 per bushel level are at the highest pre-2022 February price since 2008. The May CBOT soft red winter wheat versus the May KCBT soft red winter wheat spread at over $1.00 per bushel premium for the KCBT wheat is a sign that consumers are hedging requirements and concerned about scarce supplies and rising prices.
The demand is consistently rising
- The global population is around the eight billion level and rising, putting upward pressure on the demand for the agricultural products that feed the world.
- Addressing climate change is increasing the demand for corn, a primary ingredient in U.S. ethanol production, and soybeans, the oilseed required for biodiesel output. Grains and oilseeds have an ever-expanding role as food and fuel.
- The latest February USDA World Agricultural Supply and Demand Estimates report continued to point to tightening fundamental balance sheets in the grain and oilseed markets.
Inflation is pushing input prices higher
- January consumer and producer price indices came in higher than economists’ expectations. The January Personal Consumption Expenditures Price Index, an inflation metric watched by the Federal Reserve, also was above forecasts. Rising inflation remains a nagging economic problem.
- Higher interest rates increase production costs for farmers as many finance crops.
- The highest energy, labor, and land costs in years cause production costs for each bushel to rise.
The war makes input and output an economic weapon
- Russia and Ukraine are significant wheat, corn, and other agricultural producers and exporters. As the fertile soil in Europe’s breadbasket remains a battlefield, production from the region will likely decline.
- The Black Sea Ports are a crucial logistical export hub that remains a war zone, impeding the flow of agricultural products to worldwide consumers.
- War distorts prices, and Russia has used energy and other commodities as economic weapons against “unfriendly” countries supporting Ukraine. Russia is a leading fertilizer exporter, making the critical farming input more expensive and scarcer, inhibiting crop production worldwide.
The weather is critical, but geopolitics makes the situation challenging
- The uncertainty of the weather conditions in leading growing areas tends to increase price volatility in the grain and oilseed markets during the planting and early growing season each year. Drought, floods, or other weather-related events can cause prices to soar.
- The most direct route for risk positions in grain and oilseed markets is via the futures and futures options on the Chicago Mercantile Exchange’s CBOT division.
- The Teucrium suite of grain and oilseed ETFs, including the CORN, WEAT, and SOYB ETFs, do an excellent job tracking the price action in the futures arena as they hold portfolios of actively traded futures contracts.
The war in Ukraine, inflation, increasing demand for alternative energy, and the uncertainty of the weather conditions over the coming months favor lots of volatility in grain and oilseed prices in 2023.
Thanks for reading, and stay tuned for the next edition of the Tradier Rundown!