Steve Kell’s
Market Minute
Last month was the second time in my 30-year career in the grain business that I’d seen Chicago corn futures trade above $8 per bushel. The current strength in commodity prices is no doubt the result of two global factors; inflation and the war in Ukraine, which is having a significant impact on world grain supplies and movement. The first time that corn futures rallied above $8 was July of 2012, and was the result of a summer weather rally because of a North American drought. The important thing for Ontario farmers to keep in mind is that although we’ve got historically high prices, we have yet to get to the summertime weather markets and they are certain to come.
Weather markets in the agricultural commodity futures are a bankable event. There has yet to be a year when at some point in the growing season, (usually relatively early the summer), when some environmental event causes market watchers to become worried about the yield potential of the crop in the field, and prices take off. If you take, for example, December corn futures over the previous six growing seasons, (2016 through 2021), the summer weather rally averaged 20 days and raised corn futures an average of 12.5%. These rallies all started before the end of June and tend to run out before August.
The world’s current geopolitical situation super primes us for weather volatility in the markets this spring and summer. Ukraine used to be the world’s sixth largest corn producer. In 2021 they harvested a crop of more than 28 million metric tonnes. Obviously the uninvited visit by the Russian army has refocused Ukraine’s priorities this spring, and their capacity to produce a substantial volume of corn this year, or their ability to distribute it into the world market are doubtful.
If North American corn producers were going to grow enough corn to make up for Ukraine’s output, we would need to plant roughly 6.5 million acres more corn in 2022 than we did in 2021, but if the USDA’s planting intentions report this past March 31 was accurate, American farmers are actually planning to plant less corn. With fewer acres in production, yield potential becomes even more critical in attempting to reach the world’s required supply of corn. Growing season weather is the ultimate variable in crop yields, so a nervous market is certain to trade on it.
Although we’ve seen the biggest consequences in wheat pricing since the Russian invasion on February 24, the potential for even more exaggerated price swings due to growing season weather for wheat is very likely. There are two reasons why wheat pricing has the greatest potential for a big weather rally this coming spring and summer. First of all, Russia is the third largest wheat producer in the world. Ukraine is the seventh largest. 23% of the world’s exportable wheat comes out of the Black Sea ports, and no other region in the world has the surplus supply to backfill the void that this war has created. Secondly, western Canada and the north western US plains had a drought last summer, which significantly reduced wheat yields, and lowered stocks . If there is even a hint of drought returning to the US high plains and Canadian prairies this summer, wheat markets will react.
The interesting thing about wheat futures is that the prairie spring wheats are traded on the Minneapolis futures exchange. The soft winter wheats, which we grow in Ontario and really the entire Great Lakes basin, are traded on the Chicago wheat futures contract. Although there is only a very limited capacity to substitute soft winter wheats for hard spring wheat in a flour mill, the spec funds don’t really know that, and since there is more volume and liquidity in the Chicago futures, if the weather creates problems for hard spring wheat yields, it will become a pricing opportunity for soft winter wheat growers in Ontario. If the Dakotas and Saskatchewan go two weeks without rain in June, winter wheat prices in Ontario will go off like a rocket.
The spring of 2022 is a really interesting period in the history of grain markets, not only because we are already trading at all time record highs, but because we have yet to reach the point in the season where weather markets fuel the rallies, and particularly in light of this year’s precarious supply considerations, there’s no reason to believe that we won’t have a weather rally in the weeks ahead.
Simcoe crop farmer Steve Kell handles grain merchandizing for Kell Grain, with elevators in Belleville and Gilford.
