Yesterday USDA did what you would have expected them to do: Assure the world that we are not going to run out of food stocks. So rest assured, we will all live through the current world turmoil.

It was not surprising that USDA put the corn and bean numbers where they did. Corn stocks at 1.440 billion bushels was a near exact hit for our estimate and world numbers were just a little over the AgMarket.Net guess. There was no real reason to reduce the South American corn crop until we see the Safrinha crop make it through pollination. The bean number, however, was probably still overestimated as the bulk of Brazilian beans production estimates are 125-121 versus USDA at 127. In time we suspect these adjustments will be made, as well as an upward adjustment to U.S. exports and a result in U.S. bean end stocks falling below the 285 million bushels announced Wednesday.

Wobbly wheat numbers

The only place to argue USDA’s numbers were wheat. China’s crop conditions reflect 20% of their crop is the worst ever recorded, which could mean a 5-10 million metric ton loss; the U.S. crop is also in poor condition and could be 5 mmt, and private consultants are estimating losses as much as 15+ mmt of wheat in Russia and Ukraine due to weather and potential harvest disruptions.

Related:Wheat continues limit drop on March 2022 WASDE

Now we have to say that the world wheat crop has about 3 months of growing time to improve. So a lot can change. Plus, no one has any idea of what will happen to Russian and Ukrainian exports. Together, they make up about 30% of the world’s wheat supply. So it is a big deal.

USDA did reduce Russian exports by 3 mmt and Ukraine by 4 mmt, and shifted 2 mmt of demand over to Australia, 0.8 mmt to India, and a splash to Canada and Brazil for a net decline in exports to 3.58 mmt. Given what we have all heard, USDA is being conservative, as it should, but reality is that field losses and hoarding, once crop is harvested in the Black Sea region, as well as the other issues I mentioned, could amount to a 30 mmt reduction to “available” supply and would result in a much larger adjustment than 3.58 mmt.

Historically, the most exports can be expected to decline is 11 mmt worldwide in one year. So if the decline in available supply is closer to private estimates, the world will be chasing limited supply. We’ll see as there is no reason to get too excited until we see how the crops in North America, China, and the Black Sea region, develop.

Black Sea plantings

Adding to volatility is the uncertainty of Russia and Ukraine getting the 2022-23 crop planted. Shortages of herbicides, fertilizer, Sunflower seed, fuel, and skilled operators will complicate the process. These are the two largest sunflower exporters, and according to Oil World, they make up 13.5% of world supply. They also account for about 18% of world corn exports.

Related:Special report explores agriculture impact of Russia-Ukraine conflict

Potential Black Swans

As countries react to protect themselves from further issues at home, today’s headlines could have a big impact on grain demand and supply. The headlines include:

Obviously, a decision that impacts biofuel requirements would set a precedent that markets no longer need to ration supply to demand as Government intervention will do the job. It also is 100% contrary to the green movement that most governments worldwide have emphasized and fought so hard to accomplish. But this would certainly be a Black Swan we need to look for.

What to watch for now

Signs of peace? Ukraine suggested it is ready for a diplomatic solution but also said it is not willing to give up one inch of sovereign territory. So at this point we have to assume this conflict will continue. Thus, more supply chain issues and geopolitical impacts on the markets will cause further volatility.

If a diplomatic solution were reached, markets would most likely move lower very quickly. Re-read that sentence again and let it settle into your risk management strategy.

Are current wheat prices justified? History suggests the wheat market might be as much as $2/bu. overvalued relative to total ending stocks. Be careful with this statement – not all these stocks are “available.” Remember many countries are halting exports or imposing sanctions to prevent “availability” even though the supply is there. Current prices are justified, however, when you look at commodity values when crude is high priced.

Oil could be early indicator. For a historical comparison, look at commodities when crude traded at $147/barrel in July of 2008. This study suggests that producers should keep one eye on crude oil. If that falls, look out.

Weaker dollar would be friendly. The U.S. Dollar is another outside market that could change things. Obviously when world turmoil takes place, money flows to the U.S. and the dollar goes up. Talk of higher interest rates also attracts money to the U.S. However, a diplomatic agreement in Ukraine might cause outflow and a weaker dollar. This of course would be friendly for commodities especially if weather in the next growing season is less than ideal.

Weather and world crisis. U.S. subsoil conditions are getting worse as the drought in Southern Plains is starting to merge with the Northern Plains. No one knows what will happen, but as one head economist at a large Agricultural Company said, we are only one bad crop away from a world crisis. As sensational as this sounds, it is not. We are witnessing the perfect storm. I could go into great detail about the possible effects and outcomes of a world food crisis, but we will save that for later.

The most important thing our clients need to know is that the market is offering substantial profit opportunities. When it ends, it will most likely end badly. And fast. And leave you wondering why you didn’t (fill in the blank).

So, consider buying puts and get a floor under this market. If you sell cash, then get calls bought on ½ those bushels in case we do have that weather crisis. The last time crude was this high, it hit 33/bl within three months. Where do you think corn will be then? Will the market care that it cost you $750-$1,250/acre for you to produce that corn?

If you act now, you can probably lock in $900-1,440/acre in revenue using an option where your upside is still open.

So what are we all waiting for? The top?

Reach Bill Biedermann at 815-893-7443 or [email protected].

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