Market Insider

Considering 2023 New Crop Sales

Grain markets had a mostly positive week as a somewhat bullish WASDE report provided some buying incentive, thanks to smaller inventories than what the market had been expecting. For U.S. corn, while the average national yield was raised by a full bushel to 173.3 bushels per acre (bu/ac), harvested area was lowered by an incredible 1.6M acres and, accompanied with a small drop in demand, probably caused some short covering in the market. U.S. soybean harvested acres were also lowered by 300,000 but the bigger surprise was average national yields being felled by 0.7 to 49.5 bu/ac, and so now more analysts are wondering, at what price does demand start to look elsewhere or slow its buying?

For wheat, in a separate report, the USDA raised winter wheat planted acres to 36.95M acres, 2.5M acres more than what traders were expecting and an 11% increase year-over-year. While this may look bearish on paper, there are many skeptics out there about just how much of these extra acres will get harvested, given the drought conditions most of the U.S. Southern Plains continues to experience. As a reminder, if detrimental weather is a factor, new crop premiums in the low-protein wheat market tend to only show up once the crop’s yield potential is better known.

There were some updates to the 2021/22 old, old crop U.S. wheat balance sheet with stocks increased by nearly 30M bushels (or ~816,000 MT), but 75% of this was in winter and white wheat. The point the market took home though was that the 2022/23 U.S. wheat balance sheet is maybe a bit healthier than what was first thought (albeit, not by much). It was also a bit surprising that the USDA didn’t revise their U.S. exports number lower this go-around. On the broader global balance sheet, the most noticeable changes were in the EU, where carryout was raised by 900,000 MT, mainly thanks to a 1 MMT increase in imports. Ukraine’s balance sheet saw changes to production (up 500,000 MT), exports (down 500,000 MT), domestic feed (down 500,000 MT), and carryout (up 500,000 MT).

What didn’t change that was also noticeable was production and export numbers out of Australia, as reports continue to suggest impressive yields and shipments thus far. On the opposite end of the spectrum (and map), Argentina found an extra 280,000 MT of 2021/22 wheat, which helped increase 2022/23 carryout by the same amount, but drought conditions remain, which will impact that country’s corn and soybean harvests. As such, the market seemed to care less about the Buenos Aires Grain Exchange’s production downgrade of the Argentine soybean crop to 41 MMT, as instead, the USDA only lowered their estimate to 45.5 MMT. On the flipside, the Brazilian soybean crop was raised by 1 MT to a record 126 MMT.

Ultimately, as She usually does, Mother Nature will have the largest say over the next few weeks and months on markets, as She influences supply. Any demand changes likely having subtle impacts on the market, barring some major geopolitical event (like another Ukrainian invasion-type disruption). If we hear less talk of economic recession, there’s a strong likelihood that money managers could push more of their portfolio back into stocks and bonds, and out of commodities, which doesn’t help crop values all that much. More broadly though, there are plenty of unknowns – be it South American production, what the Ukrainian winter wheat crop will shape up to be, and the aforementioned global economy – but there are some strong prices and returns available today for 2023 new crop.

As it stands, new crop HRS wheat prices, both at the cash level across Western Canada (chart #1 below) and the futures board in Minneapolis (chart #3), are tracking very similar to this time a year ago. Cash values are performing slightly better that futures, simply because basis levels (chart #2) are about a half a dollar more than at this time a year ago. In fact, at almost $1.60 per bushel, new crop HRS wheat’s basis accounts for over 15% of the cash price, a level we haven’t seen except in late June and late September during the last two growing seasons. Therein, locking in some basis today and being able to price the futures during highs we usually see in late May to early June could be a profitable option to consider for fall delivery.

For new crop CPS wheat prices, it’s a bit of a similar storyline, as basis levels account for nearly 13% of its cash value for September delivery, the strongest it’s been for this time of year (see chart #2 below). In terms of a percentage of the cash price, CPS wheat’s basis tends to improve once we get into March, which is usually when there’s more speculation about the Northern Hemisphere’s winter wheat crops as they exit dormancy. That said, the biggest driver for Canadian CPS wheat prices will be what comes of the U.S. and Ukrainian winter wheat crops in a few months time, as well as where the U.S. Dollar goes. Something to keep in mind if you’re looking to lock in basis, is that Kansas City HRW wheat futures (chart #3 below) tend to peak between mid-May and the first week of June. If you’re not looking to play around with futures or basis, CPS wheat new crop cash prices (chart #1 below) tend to perform similarly to the futures market, so maybe worth setting a calendar reminder in your phone to put in a 30-day target in late April?

Finally, while new crop durum bids aren’t yet showing up on PDQInfo.ca, we know that most areas across the Canadian Prairies are seeing a $12/bushel handle for fall delivery. As the chart below shows, this is generally in-line with what we saw at this time a year ago, at least until the planting premiums started to show up in May 2022. Historically-speaking though, without any major weather or demand disruption, new crop cash durum prices don’t tend to move too much between now and mid-July.

Overall, with the USDA’s January WASDE report last week showing the ongoing tight balance sheets, crop prices are likely to stay elevated until production potential is clearer (and if they can replenish reduced world inventories). On a more macro level, I continue to be cognizant of some variables that could further support price increases like fertilizer shortages or reduced exports from the likes of China, India, Russia, and Belarus, as well as geopolitical issues between Russia and the rest of the world, and China and Taiwan (and the rest of the world). Nonetheless, the likes of lower export and feed-use to demand will weigh on U.S. corn prices, which will trickle into other areas, including wheat. Suffice to say, as it stands today, while there are a few bullish variables, without any major headlines, the market is trading more like the supply from Harvest 2023 will be adequate.

To growth,

Brennan Turner

Independent Market Analyst