Steve Kell’s
Market Minute
One of the most interesting things about the 2021 North American grain crop as harvest wraps up is how astonishingly similar it is to just one year ago. There are some significant differences in crops like hard red spring wheat and canola, which are primarily produced in regions that experienced a severe drought this past summer. But for the core commodities which make up most of the production in Southern Ontario (corn, soybeans, and soft red wheat), the supply and demand balance sheet is very similar to last year.
What’s curious is that by the USDA projecting US corn ending stocks for the 2021-2022 crop year at 1.5-billion bushels right in line with last year’s 1.25 billion bushel corn ending stocks, they have basically said that the situation is the same as last year. A 10.1% stocks-to-use ratio compared to last year’s 8.3% stocks-to- use ratio.
According to projections we’ve moved from a 21-day surplus supply of soybeans from the 2020 crop to a 26-day surplus supply of soybeans from the 2021 crop. The extra 5 days of soybean supply is hardly significant and could easily disappear with an adjustment to export sales, or final yields.
What is also really important to note is that the key market drivers which fueled the 2020 – 2021 grain market rallies are also in place as we move into the new crop marketing year.
The trigger of the big oilseed price rally which started last fall was the La Nina weather event which caused a drought in major soybean producing regions in Brazil and Argentina. While market watchers have been closely monitoring water temperatures in the equatorial Pacific in order to gauge the potential for a second “la Nina” year. By mid-October, the NOAA made it official and declared that a consecutive La Nina weather event is in effect for the fall and winter of 2021-2022. What this means for production agriculture, is that Brazil, and the south western United States will both experience less than normal rainfall, and that the Great Lakes basin, will receive more.
The second big grain market driver of 2021, Chinese import demand, is also still largely in place for the foreseeable future. There were several contributing factors which propelled Chinese imports of corn and soybeans to record levels in 2021, from replacing inventories drawn down during the China – US tariff war, to lower domestic production in China due to flooding, and also simply trying to buy up stocks in the face of uncertain production coming out of Brazil and Argentina. While it might be a bit overly optimistic to expect that same collection of factors to drive China to a second consecutive year of record grain imports, the fact remains that China still represents a quarter of the world’s population, and there’s no reason to believe that they will not remain a substantial source of grain and oilseed demand in the year ahead.
This is pure conjecture on my part, but with similar market forces driving both supply and demand, we should expect to see similar average prices in the 12 months ahead as we saw last year. I do not believe that we will see the extreme swings in grain values which Ontario farmers saw between harvest last year and the summer of 2021. Going into harvest last year, soybeans were $12.50/ bu and elevators were posting $170/mt for new crop corn. By mid-summer, crusher soybeans touched $20/bu, (an increase of 60%), and end users paid as much as $385/ mt for corn. (an increase of 126%). With harvest all but wrapped up at this point, it’s pretty clear that 2021 is not going to revisit the 2020 harvest lows, but I’m also not convinced that the market has the collective anxiety to retrace last summer’s record highs either.
There are two big variables that could drive prices out of last year’s pattern. The first, which is unfolding right now, is how severe will this year’s La Nina event be on South American soybean production? The second is whether or not this fall’s record high fertilizer prices will start to impact farmer’s 2022 seeding intentions. If it looks like producers are migrating to more soybeans and less corn for next year, then cash prices for those crops are certain to react.
What’s really interesting at this point is that we’re seeing two consecutive crop years with both remarkably similar supply and demand models, and similar market forces driving price. It almost feels as though we will jinx it by saying it out loud, but for now it provides clear guidance on pricing expectations and targets.
