Volatility continues in global grain markets

Jan Shepel
Correspondent
Volatility is here to stay in the grain markets for awhile says John Heinberg, market advisor, Total Farm Marketing by Stewart-Peterson, West Bend.

MADISON – Volatility is here to stay in the grain markets but it’s difficult for producers to grasp some days, says John Heinberg, market advisor, Total Farm Marketing by Stewart-Peterson, West Bend. “When you wake up and beans are down 30 cents at 8 a.m. and then by the end of the day they’re up five.”

That volatility is baked-in right now since corn and soybeans are in such a high-demand market. During a presentation in Madison, Heinberg outlined the factors that are affecting U.S. grain markets, even as farmers plan what they will plant next year.

Grain prices have been well-supported since harvest, he said, and it has continued. March corn contracts pushed through the $6.20 per bushel barrier the day he spoke. “This is a market with a lot of support under it.”

Heinberg spoke in person during an Agricultural Outlook Forum on the UW-Madison campus January 25. Attendance was down for the annual event, doubtless due to Covid concerns, but during the daylong event as many as 60 people were following along on sponsor Renk Agribusiness Institute’s You Tube channel (including this reporter.)

John Heinberg

To see graphs and charts used by Heinberg in his presentation, go to renk.aae.wisc.edu/2022-agricultural-outlook-forum/. A link on that page also allows visitors to view a video of his presentation and those given by other speakers during the forum.

The U.S. grain market is trading at a historically “good value,” he said, adding that “we don’t spend a lot of time above $6 corn. We don’t spend a lot of time above $14 soybeans as we’re poking at right now. That’s an opportunity for producers to protect the downside risk.”

The market analyst said he calls this a “market cycle of emotions.” When he talks to producers, they are happy and excited. “But that’s also the time when we have the most risk in the marketplace. People need to keep that on their radar.”

He said the market conditions that induce euphoria often come with maximum risk to those in the market. At the opposite end, where marketers and producers may feel “hopeless” is often the place where maximum opportunity is to be found.

The latest USDA report (from January 12) showed that soybean and corn stocks have improved from where they were last year, especially beans, he said.  “But they’re still tight overall.”

Though stocks are higher than a year ago, the market is still well supported, he added, and looking at a history of the last handful of years, stocks are historically low.

Heinberg said he likes to look at the stock-to-use ratio which is still “relatively tight.” It’s below 10 percent for soybeans and around 10-12 percent for corn. “That tells us that we have around 20-30 days of available supply to the market.

Stocks to use key

“When the USDA reports come out, that stocks-to-use ratio is the key number,” he said.

The market is looking at stocks versus usage globally and Heinberg said we are going into our third consecutive year where usage is going to outstrip production, based on weather and the lack of grain supplies. “We are producing a nice amount of supply, but the usage is there and we possibly have a hiccup in the market in South America. The market’s already starting to jump in and price that premium in.”

Weather for next year will be a big focus and it already is, he said. The La Nina weather pattern in the Pacific Ocean west of South America has been affecting that continent’s grain growing regions. The main focus for the grain market is Paraguay, southern Brazil and northern Argentina.

While the La Nina weather pattern in the Pacific Ocean west of South America is impacting that continent's grain growing regions, weather in the Plains is already creating concern. Currently growers in the southwestern Plains states are experiencing drought that is degrading their wheat crop

Heinberg said it was 105 degrees there on the day he spoke in Madison and forecasters predicted that kind of heat all week, with minimal rainfall. Market analysts are predicting that if that kind of heat and drought continues, the Brazilian bean crop will be seriously short. If that happens, global bean supplies will be extremely tight.

“The South American weather is putting pressure on the U.S. producer to have another bumper crop,” he said. “The weather issue for us this summer will be very volatile in the marketplace.”

Weather in the Plains is already creating concern. Currently growers in the southwestern Plains states are experiencing drought that is degrading their wheat crop, he said.

Exports are another question to be worked into the market. Export sales of soybeans on the books are lagging 24 percent behind USDA projections and that is creating a cloud over the market. People are still wondering if China will step into the market and make purchases after the verdict is in on the South American crop and how the weather affected it.

Record soybean crush

Demand domestically for soybeans has been high. The soybean crush last month was a record – not so much to supply soybean meal to the market but for the oil. “There is a big push in the soybean oil market. They want it for biodiesel and jet fuel made from biodiesel,” he said.

There will be new crush capacity opening later this year that could bring another 100 million bushels of crush, which will really put some extra pressure on the soybean market, he said. And currently soybean oil is the cheapest of the world’s edible oils so that helps the demand side too.

Demand domestically for soybeans has been high. The soybean crush last month was a record – not so much to supply soybean meal to the market but for the oil. Corn usage for ethanol has seen its biggest jump since 2016 and ethanol producers are showing strong profit earnings potential.

Heinberg said corn is a good value to the world and that’s why we’re seeing the export window open up for corn right now. In the case of corn – like beans – industrial usage is important. Corn usage for ethanol has seen its biggest jump since 2016 and ethanol producers are showing strong profit earnings potential.

As producers make decisions this spring about what to plant, Heinberg predicts an “acre battle.” Growers of cotton, wheat, oats and other relatively minor crops all want acreage and today’s soybean-corn ratio says farmers should plant beans, he said.

“But if we don’t have 90 million acres of corn next year we don’t have enough. That will really tighten up the supply given the demand side of the equation. It will be an interesting battle.”

Market investors

Volatility also comes from another source: managed money, hedge funds and investors that put money into the market. Heinberg said there’s a lot of room for money to move into the commodity market and push soybean prices higher. “Headlines moving one way or another and we could see that money move extremely quickly.”

The market could also be swayed violently by things like global events – a major news event in Ukraine or crude oil prices that ramp up closer to $100 a barrel.

The key to success in a volatile grain market will be flexibility, says market advisor John Heinberg. “Instead of worrying how high prices can go, take advantage of the opportunity and manage the risk."

“Volatility is not going away,” he said.

The key to success in this market will be flexibility, he said. “Instead of worrying how high prices can go, take advantage of the opportunity and manage the risk,” he advised producers.

They also should “stay disciplined to targets; and build a base through cash sales and defensive strategies.”

Market the opportunity and “own the potential,” he advised. Producers need to measure the risks of doing nothing versus the cost of using marketing tools and strategies.

And Heinberg advised that producers should “not forget about 2023. Don’t fall asleep on the future.”