August 8, 2022
USDA’s key Aug. 12 crop report lands at a fraught time for markets. While Wall Street moneybags debate inflation and recession, commodity prices show signs their 2022 bull run may be coming to an end.
The closely watched World Food Price Index fell sharply last month, though it remains near record highs. And crude oil, with ties to both crop prices and input costs, cracked on fears of weakening demand, despite a smaller than expected bump in output from OPEC and its allies.
Adding to the uncertainty, an employment report Friday that showed the U.S. economy created many more jobs than expected in July, giving the Federal Reserve plenty of ammunition for another large interest rate hike in September.
I look for USDA to make a small cut to its corn yield forecast; models suggest 176.2 bushels per acre is justified. While some of the data points to better soybean yields, that crop won’t be made until August is over. As a result, government economists may keep their forecast at 51.5 bushels per acre.
As for acres, it’s anybody’s guess, as I wrote last week.
Good news on fertilizer
Growing corn and soybeans next year – and harvesting this year’s crops -- still won’t be cheap. But lower fuel and fertilizer bills should ease the pain a bit if current trends hold.
The best hope for lower fertilizer costs came last week from the U.N.’s Food and Agriculture Organization. Its food index dropped 8.6% for July, thought it remained 13.1% above year-ago levels. Food prices are a key determinant of global nutrient expenses, so while there are plenty of uncertainties, the pullback could lower demand for N, P and K.
On the supply side of the price equation for fertilizer, we still don’t know if China will be exporting significant volumes of nitrogen and phosphates, or if fertilizer will flow from Ukraine after a start to grain exports out of the Black Sea last week. Potash supplies from Belarus and Russia remain a question mark, too. And the hurricane season in the Gulf is due to kick into high gear this month, which could threaten already precarious world natural gas flows that are slamming production in Europe.
The drop in the food index came at a cost for farmers. Most of the decline resulted from lower prices of cereals and vegetable oils, reflecting the drop in futures from spring highs.
Lower fertilizer prices also could take time to develop. While some dealers on the southwest Plains continue to offer ammonia in the $1,000 to $1,100 range, prices in other parts of the Corn Belt are stubbornly higher ahead of fall application. If 2023 world crop acres return to 2021 levels, the drop in food prices suggests retail ammonia could eventually dip to the $825 to $925 level. Of course, that assumes no further surprises.
Urea prices out of the Middle East and Gulf traded back above $600 last week, with Plains dealers cutting offers to $660 to $800. Fundamentals put the low end next year’s price down to $565, though higher values could persist too.
Phosphates and potash could also ease in 2023, but potential cuts don’t look quite as big as those for nitrogen. DAP is offered below $1,000 at some locations currently, with $825 looking possible next year. Fundamentals suggest potash around $685 to $725, compared to the $850 area seen on some recent offer sheets from dealers.
Less pain at the pump
Despite pressure from the Biden Administration, Saudi Arabia and the rest of OPEC+ decided last week on only a minimal increase in crude oil production. Crude prices continued to tumble near six-month lows nonetheless due to fears of weaker demand from a slowing global economy.
U.S. drivers already appear to be taking their feet off the accelerator as the summer driving season winds down. Chicago ULSD prices are 30% off recent all-time highs, though the $3.30 a gallon sticker is more than $1 above last year’s level.
Seasonally, basis between cash and futures is at weak levels, suggesting this might be a time to refill tanks. Crude traded below $90 last week and has risk to the low $80s according to my models. But diesel costs often march to the drum beat of agriculture as farmers ramp up harvest and fall field work.
Weather, and not ag demand, drives propane prices, which normally strengthen into fall to incentivize stockpiling for winter. But propane follows crude generally, so values for the drying fuel staged a counter-seasonal decline this spring and summer. Last week’s setback in crude took the Conway, Kansas hub price down to $1.07 cents a gallon, which could mean on-farm values around $1.85 in the Corn Belt, less than last fall for those who refill soon.
Demand growth stalls
Lower fuel prices are a double-edged sword for growers if the decline comes from a demand slump. That could mean less ethanol needed for blending, which could keep the corn grind flat next year, as well as reducing the push for biodiesel.
Indeed, while lower food prices are good news for a hungry world, they don’t necessarily translate into stronger demand for U.S. corn and soybeans. A recovery in global corn and soybean production in 2022 and 2023 would pressure U.S. export hopes, though much is unknown about supply elsewhere too. Drought in Europe, the war in Ukraine and another La Nina growing season in South America could change the dynamics quickly.
Still, end users from abroad don’t appear to be jumping on the corn bandwagon yet. New crop sales in August ahead of harvest are only a marginal predictor of what will ship over the following 12 months. But the current total is down by more than half from last year.
Soybean bookings, by contrast, were reported last week at 561 million bushels, close to an all-time high for the preseason, and China’s 2022-2023 deals to date represent 57% of the U.S. total, in line with the recent average. USDA forecasts a robust recovery in Chinese soybean imports after the pandemic slump and if that trend holds, total exports could stay near this year’s level. But if there’s any hiccup out of Brazil and Argentina, the total could be even stronger.
Corn usage by the livestock sector could be down even more than the 4.5% drop USDA forecast last month. Though demand from the poultry, egg and dairy industries looks promising, red meat production is set to drop, limiting how much all the critters will consume.
Despite those constraints, soybean crush could increase a little for 2022-2023. Less corn ground for ethanol means fewer DDGS to compete with meal. Vegetable oil has lost some of its luster after moving
to record highs, but still commands around 41% of the soybean’s value, nearly 10% more than its long-term average.
So, whatever the news about production Aug. 12, remember that supply is only part of the price equation. Demand should start to become more important to buyers and sellers, if only by default from a news vacuum about supply. With USDA production reports coming only once a month, the rumor mill will need grist to digest, and there’s plenty of that on the other side of the balance sheet for grains.
Knorr writes from Chicago, Ill. Email him at [email protected]
The opinions of the author are not necessarily those of Farm Futures or Farm Progress.
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