Market Insider

Bigger Black Sea Harvest, Bigger Trade Issues?

Grain markets were mixed last week as additional production and trade risk was priced into cereals, while oilseeds pulled back with energy markets and heavy Argentine soybean selling. However, this month’s USDA WASDE report, published on Monday, September 12, 2022, suggested smaller soybean yields, which quickly helped reverse last week’s losses (more on the WASDE in a bit). While Ukrainian forces seem to be making some substantial progress as they aim to take back over eastern areas of the embattled nation, Vladimir Putin has expressed heavy pessimism that Ukrainian grain exports are going to Europe, and not poor countries like intended, and that the “grain corridor” deal signed almost two months ago may not be extended.

On that note, Turkish President Erdogan echoed his buddy Putin’s comments, whereas Ukrainian officials argue that at least two-thirds of the grain exported since the July 22, 2022, deal, has been to Asian, African, and Middle Eastern countries. While the trade risk remains real, the Ukrainian Ministry of Agriculture reported last week that 60% of their harvest is complete, with almost all the wheat now harvested, totaling 19.2 MMT and an average yield of 4.1 MT/hectare, or 61 bushels per acre. Comparably, the USDA suggested in the September WASDE that Ukraine’s wheat harvest could total something closer to 20.5 MMT, 1 MMT more than what they printed in their August WASDE.

Bigger wheat yields seem to be the norm in the Black Sea, as the USDA raised their estimate for Russian production for a second straight month, this time by 3 MMT to now sit at 91 MMT. This is more in line with private estimates, and if realized, harvested acres, average yields, and total production would all be new records. Russian wheat exports were stayed at 42 MMT but just a subtle reminder that Ukrainian and Russian wheat tend to compete with one another in global markets so with one player controlling both markets – via export taxes and potentially another quota in Russia, and the Kremlin’s handling of “safe ports” in Ukraine – trade competition from the Black Sea could turn ugly (but hopefully not violent!).

Nonetheless, between Ukraine and Russia alone, this accounted for most of the 4.32 MMT increase in the global wheat harvest from the USDA’s estimate in August. Strong consumption though, continues to point lower ending stocks worldwide for the fourth straight year. In fact, with the wheat prices pulling back since the highs in mid-May, they’re now much more competitive in the livestock sector, creating more feedstuffs demand for the cereal at current values. Overall though, the market seems to be interpreting this month’s WASDE report as mostly neutral for wheat prices.

Elsewhere on the USDA’s wheat balance sheet, they added an extra 600,000 MT to Canada’s 2021/22 harvest, but immediately earmarked some of those “extra” bushels in domestic demand as exports were stayed at 15 MMT. Similarly, extra domestic demand was found in Europe, helping to push their 2022/23 ending stocks below 10 MMT. In Australia, the USDA kept Harvest 2022 at 33 MMT, albeit the local Aussie government forecaster, ABARES, believes the number could be closer to 32.2 MMT. Expectations from the national weather bureau in the Land Down Under suggest a 70% chance of La Nina returning this spring, meaning ample soil moisture again for Australian farmers’ paddocks for Plant 2023.

What there may not be enough of though in 2023 is fertilizer (and therefore, food). Since fertilizer requires a lot of energy to be produced, and most manufacturers use gas for such energy needs, many players have slowed down their output since gas prices are up nearly 300% year-to-date. As a result, it’s now been estimated that almost 70% of Europe’s fertilizer production has been taken offline! Combined with Russia, Belarus, and China still restricting fertilizer exports, many are asking, “who makes up for the shortfall?” I have a few ideas but the basic implication is higher prices, despite ammonia already trading 5X higher than where they were 18 months ago. Further implications would be seen in the food trade, as we’re seeing protectionist food policies coming back to the table, with India official banning exports of broken rice last week, in addition to putting a 20% export tax on a variety of grades.

To round things out, as the market expected, the USDA lowered average U.S. corn yields at 172.5 bushels per acre in their September WASDE, down 2.9 bushels from last month’s forecast and 4.5 bushels below last year’s average yield. With harvest acres down 5% year-over-year, this means a U.S. corn crop under 14 billion bushels, and 8% below Harvest 2021. For soybeans, the market wasn’t expecting a yield decline of 1.4 bushels per acre to 50.5 bushels, and in turn, oilseed prices climbed significantly on the news. With harvested area up less than 1%, America’s soybean production is pegged at just under 4.4 billion bushels, about 3% less than August’s estimate and 1% below Harvest 2021. Staying in the yield game, this Wednesday, September 14, 2022, we’ll get Statistics Canada's second estimate in three weeks of the country’s yields and production, so we’ll look at those fresh forecasts in more detail next week.

To growth,

Brennan Turner

Founder | Combyne Ag