China, conflict, capital all impacting markets 2023 AMMO recap

The back end of the 2023 Agricultural Marketing and Management Organization’s winter schedule was heavy on marketing seminars, a perennial favorite topic of growers. Rob Froom, senior central hedge desk manager at United Grain Corporation, kicked it off in Colfax, Wash., where he told producers there are a lot of balls in the air with no one, clear, day-to-day driver of commodity prices. There are four “C”s, though, that are currently driving the market:

• China. During COVID-19, Chinese leaders locked everything down so people weren’t consuming as much. The country has opened up, recently, which is bullish because they are importing more and citizens are traveling again. 
• Conflict. Primarily the Ukraine/Russia war, but Froom is also concerned about a potential conflict between Taiwan and China. He explained that a Taiwan/China conflict would be very negative for the U.S., because China is a major importer of corn and soybeans. “If China and Taiwan butt heads and we start sanctioning Chinese companies and they say they are not going to buy U.S. commodities, that would impact wheat prices,” he explained.
• Capital. Online trading, Froom said, has opened the door for algorithmic traders who don’t care about fundamentals. The withdrawal of stimulus money and inflation are also factors.
• Capacity. On the West Coast, there’s too much export capacity and not enough business. Farm capacity is also an issue, with Froom questioning how much grain is in home storage.

World GDP growth has slowed, and the U.S. is fighting inflation thanks to supply and labor issues. Froom expects interest rates to remain high for the rest of the year as the Feds try to slow inflation.

“Not only the U.S., everybody has struggled with this,” he said. He suggested that growers keep an eye on crude oil prices as they tend to correlate with corn and wheat prices. Although it’s not a one-to-one basis, when the price of crude goes down, generally, so do corn and wheat prices.

While China is a big driver of the wheat market, Froom called Russia the “800-pound gorilla” in the room as it’s the world benchmark of wheat prices.

“If their prices are going lower, so is the rest of the world,” he said. “As long as grain is flowing out of the Black Sea, I’m telling producers they need to reward rallies.”

In 2022, Russia grew a “monster” crop, the largest wheat crop in their history at 102 million metric tons (mmt). They’ve got an estimated 100 mmt in storage. He is watching weather in the region as it’s been dry for the past 30 days.

“So even if they have a super severe drought this spring/summer and they have a small production, they have enough carryover stocks to keep weighing on the wheat market. As this drought gets worse, yes, that’s going to open the door for some short covering rallies in wheat futures,” he said.

Looking to the Southern Hemisphere, Australia has also just finished harvesting a monster crop, the biggest on record, but extremely wet weather meant about 6 mmt went to feed, which is impacting the U.S. corn market as the feed wheat is cheaper than corn right now. Australia is also maxed out on capacity at its export terminals. Argentina had a small crop due to drought, which is also affecting corn and soybeans.

The U.S. market share is trending lower, while other countries’ market share has been increasing. Declining stocks and a high U.S. dollar are pushing exports down. Froom said the U.S. Department of Agriculture’s export target is the lowest it’s been since 1972, which tells him the market is range bound. Looking specifically at soft white wheat, stocks to usage is tight, at 15.7%, which will be supportive of U.S. soft white wheat prices.

Going forward, he recommended that growers: 

• Focus on what’s in front of them and recognize the environment they are in (is the market focused on bullish enthusiasm or bearish data?).
• Recognize the price range we are in and participate when rallies come.
• Pay attention to the seasonal.

In order for wheat to trend bullish, the market needs corn leadership, production problems somewhere around the world, and logistic problems or war.

“Add it all up, that tells me, the market is range bound. When it does get to the top end, we really want to be setting a floor out there, rewarding the rallies when they come and being realistic about marketing grain,” Froom said. “When the landscape changes, we will reassess, because this is a dynamic environment. This is why we scale up, diversify and want to ‘build a price, not pick one.’”

See Allison Thompson’s take on the current market. Thompson is a commodity broker/market analyst and owner of The Money Farm.