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Limit Up

By Tori Uhland

January 19, 2023

After the big January World Agricultural Supply and Demand Estimates (WASDE), stocks and acreage reports from the USDA came out last week, I decided to do things a little bit differently for this week’s article. Rather than give you a short-term market synopsis, I’d like to give you a market outlook on some things that we may expect to see throughout 2023 in an effort to help you with this year’s marketing plan.

To my surprise, the WASDE report was mildly bullish – or at least supportive – for corn with overall lower stocks showing up in the supply and demand numbers. The December stocks number was the lowest since 2013/14. Harvested acres were reduced by 1.6 million, the largest November to January acreage decline since 1974, which is when the USDA started publishing this data. There was an increase in acres that went to silage.The U.S. 2022 corn yield was increased by one bushel per acre to 173.3, but this was not enough to make up for the decline in acreage, so production was reduced by 200 million bushels. As expected, there was a large drop in demand. Export sales commitments are currently down 19.5 million metric tons from last year; the USDA reduced export projections by 150 million bushels, which was a larger cut than the trade expected. Taking into account the updated annual projection, current sales commitments are still 5.5 million metric tons behind pace. Feed usage was reduced by 25 million bushels. The USDA did not cut ethanol usage, despite the U.S. running nearly 5% behind last year’s production.

The December 2023 corn contract is five cents above last year’s February average for the crop insurance program. The cost of growing corn has also increased and futures will now have to buy in acres to try and build the supply to a level that demand will no longer have to be rationed.

Wheat was steady to bullish following the WASDE report. Demand is still very weak and we have the smallest hard red winter wheat exports in 51 years. The biggest news here was the 2023 winter wheat acreage number–the trade was expecting 34.5 million acres, but the USDA came out with 37 million acres instead. Crop insurance revenue guarantees are incentivizing wheat acres. The acreage number adds about 120 million bushels to the U.S. supplies, and in an already overpriced environment, this is not a bullish factor for wheat at all. However, there is a big difference between planted acres and harvested acres. As we know, the U.S. Southern Plains has struggled with the lack of moisture and snow cover paired with freezing temperatures. In many areas, there is a thin stand, or even no stand at all, so there is a question of how much winterkill and abandoned acres we will see. This does, however, add in another possibility of farmers going into failed wheat acres and planting corn and milo this spring. In the event that happens with a large number of acres, we go back to a scenario with lower wheat supplies and higher corn acres, which could be supportive or bullish for the wheat market and unsupportive or bearish for the corn market.

There are several other items of interest besides the U.S. balance sheets to keep an eye on that could have a big impact on the markets. One of these is the U.S. economy. December inflation rates were the slowest in over a year. The market thinks the Fed will hike interest rates two more times before starting to cut rates this summer, but the Fed thinks they need to maintain higher interest rates and say they won’t make any cuts until 2024. Inflationary times are generally good for commodities as that is where funds invest money, while a recession would do the opposite and hurt demand. On the other hand, the current political environment doesn’t support fund money going into fossil fuels, either. In December, Goldman Sachs reported that commodities will gain 43 percent in 2023 “as supply shortages bite.” We will see if that comes to fruition.

There is some good news for the weather forecast. We should be approaching the end of the La Nina cycle after three years of drought in the southern plains. Weather models show that moisture in the southern plains should dramatically improve this spring. Some meteorologists predict that we will be in an El Nino cycle by summer, but most believe that we won’t get to that point until after the summer. However, we should at least be through La Nina by summer and into a neutral climate for the growing season. There is an 82 percent chance that we will reach a neutral situation sometime between March and May. Other weather situations to keep an eye on include the historic drought in Europe as well as the drought in North Africa. The moisture totals in North Africa are now the fourth driest in history.

A few wild cards for the markets are the geopolitical issues and events around the world. The big one that I am keeping up on is China, as they are a big importer of our grains and a big player in our markets. We know that China abandoned their Zero-Covid policy and has started to open up travel, which will have some huge economic impacts after three years of being locked down. This can be a good thing as we could expect to see a rebound in demand for products such as grain and ethanol, but it will disrupt the world economy, create implications to world order, and add to global inflation pressure.

China is also in the midst of a historic demographic downturn. Some analysts are expecting the first drop in China’s population since the Great Famine in 1961. This drop was accelerated by Covid, but has been a long time coming. China’s one-child policy from 1980-2015 created a decline in birth rates which leads to a slowing economy. New births for 2022 are expected to be at record lows as many citizens can’t afford to have children and it is said that their medical system is a mess following the pandemic. According to a Reuters report, China’s population could be reduced by 45 percent in less than 80 years. In 1980, 5 percent of their population was aged 65 and older. Official population data will come out on January 17, but it is expected that in 2022, it was 14 percent, and it is expected to be 37 percent in 2050. Due to the declining birth rate, China’s labor force isn’t being replenished at the same rate that the population is aging. Long term, this isn’t good news for U.S. grains as a smaller Chinese population creates less demand for our ag products.

There is also the Taiwan and China tensions to keep an eye on. China and Russia conducted joint military drills this fall which is a sign of increasing cooperation between the two nations. China still has yet to condemn Russia for their attack on Ukraine last year. The Russia/Ukraine situation is still a geopolitical risk, and Putin will need to escalate or find a way out in 2023.

Many end users throughout Colorado, Kansas, Oklahoma and Texas booked rail corn from the midwest prior to the 2022 corn harvest on supply concerns. There is a major corn deficit in the area, with Kansas alone needing 500 trains to replace their usual production. This has created somewhat of an unexpected situation as it is now very difficult to find a home for unsold old crop corn for January-March. While I do think there is demand for the summer months, particularly June-September, buyers are quiet as there is still a possibility of feeding wheat. One thing that could change this is if rail labor problems return. Part of the deal that was made to prevent a strike was bonuses, and there are assumptions that many rail employees may collect their bonuses and immediately retire.

There are big dates coming that could have an impact on our markets: January 22 is the Chinese New Year and their markets will be closed for a period and traders will be out of the office. The next WASDE report will come out on February 8, though it isn’t expected to be as important as the January report. The USDA Agricultural Outlook Forum is on February 23 and the USDA Quarterly Stocks and Prospective Plantings reports will be released on March 31.

I am far from an expert, but here are my final thoughts:

Commodity prices are still at historically high levels. In my opinion, the January WASDE report was supportive, but not wildly bullish. Long term, I am concerned about prices. These rallies should be sold. December 2023 corn futures are hovering just below the $6.00 area, which is not a bad place to have around 20 percent of your expected corn or milo production priced. We will need significant export sales to China to get any big jumps higher in corn and beans, and we are getting into the seasonal decline for China’s bean imports. All major demand categories for both corn and wheat are lower and they look like they will continue moving that way, and the markets ultimately come down to supply and demand. A smaller supply doesn’t mean as much when it is followed up with low demand.

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