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Established 1988
Commodity Week is a weekly wrap-up of the CME Group grain markets with analysis and guest interviews. The program is generally recorded Thursday afternoons and posted online by 7:00 p.m. central. It airs on WILL AM580 during the 2:00 p.m. hour each Friday. Commodity Week is a production of University of Illinois Extension and Illinois Public Media. Like the daily Closing Market Report, it is hosted by University of Illinois Extension Farm Broadcaster Todd Gleason.
website: willag.org
twitter: @commodityweek
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Panelists
- Jim McCormick, AgMarket.net
- Ted Seifried, ZanerAgHedge.com
- Mike Zuzolo, GlobalCommResearch.com
The August 13 edition of Commodity Week, hosted by Todd Gleason, features panelists Jim McCormick, Ted Seifried, and Mike Zuzolo analyzing the latest USDA crop production and WASDE reports. The discussion centers on the USDA's adjustments to corn and soybean acreage, as well as the unexpectedly yield estimates despite adverse weather in the western Corn Belt. The panelists evaluate the significant geopolitical risks impacting the agricultural sector, particularly the disruption of Black Sea grain exports due to the Russia-Ukraine conflict and the tightening global supply of diesel and fertilizer linked to ongoing tensions in the Middle East. Looking ahead, the experts debate the potential impact of a super El Niño on upcoming South American production.
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Todd Gleason: This is the August 13 edition of Commodity Week.
announce: Todd Gleason’s services are made available to WILL by University of Illinois Extension.
Todd Gleason: Welcome to Commodity Week. I am Todd Gleason. Our panelists for the day include Jim McCormick at AgMarket.net, Ted Seifried from ZanerAgHedge.com, and Mike Zuzolo from GlobalCommResearch.com. Commodity Week is a production of Illinois Public Media, public radio for the farming world, available online at willag.org. Gentlemen, let’s start with a list of items. I know the World Agricultural Supply and Demand Estimates, along with the crop production report from earlier in the week, will be on that list. I will start with you, Ted Seifried. What else might you be thinking about today?
Ted Seifried: Absolutely, the report. We certainly have to talk about weather and the change in weather patterns we have seen for at least a portion of the growing area since the beginning of August. Over the last couple of days, the Black Sea area has really affected trade for corn and wheat. For me, those are the three big ones right now.
Todd Gleason: Mike Zuzolo, GlobalCommResearch.com, your thoughts and list?
Mike Zuzolo: The only other thing I would say, Todd, is to discuss the wheat and crude oil relationship, which remains very strong, and why corn prices are not jumping after the USDA surprise numbers.
Todd Gleason: And finally, Jim McCormick, anything to add?
Jim McCormick: I think for the most part, Todd, those gentlemen nailed the big topics everyone is talking about. We are good.
Todd Gleason: I want to start with you, Mike, because I am going to let you take some kudos regarding the crop production report. The numbers you released were lower than the rest of the trade, but they were very close to what USDA produced yesterday. Why do you think that was the case?
Mike Zuzolo: I think there are two reasons. The USDA changed their modeling structure, improving inter-agency communication and paperwork flow to the main people who set the WASDE expectations. The second reason involves the survey. I actually would have gone lower on my corn yield had it not been for the farmer and subscriber survey. They were not talking about grain fill and heat problems in the western Corn Belt, but satellite imagery and information to derive yield at this time of year were sounding alarm bells. The western Corn Belt and Illinois looked like they could easily bring down yields in other states that were performing better than last year. By taking the corn yield down this much, the USDA has probably taken some air out of the balloon for getting lower yields in the September report due to grain fill loss from heat. Still, it is a nice number to work from going into the harvest.
Todd Gleason: I want to come back to that in a moment. Jim McCormick, I would like you to take up the acreage changes from the USDA yesterday. They added 1.4 million acres to corn and 1.4 million acres to soybeans. This puts us at the largest combined acreage since 2012, at 183.5 million. Why were farmers able to plant that many acres?
Jim McCormick: Part of it, Todd, is looking at wheat acres, which are at 50-year lows. Part of it is raw economics. There was an argument about whether producers would plant corn because of high fertilizer costs. I always argued with clients that they buy fertilizer in the fall as a business write-off. I never bought into the story that there would be a massive shift away from fertilizer because of the price spike in late winter and early spring. The other situation is the economics of crop insurance. Subsidies are pushing more producers away from smaller crops to corn and beans. I assume that will continue unless we change how we insure these crops. Insurance dictates what many people do, alongside climate change, as acres in the northern plains that used to be wheat are now going to corn and beans.
Todd Gleason: Ted, do you agree with the crop insurance side? Is it because of the SCO/ECO combination where you can cover up to 95% of expected income?
Ted Seifried: Crop insurance always adds an incentive to plant acres. High-priced farmland also adds incentive. If you are paying a big mortgage, you will not leave it fallow. The cure for low prices is supposed to be lower production, but because of crop insurance and inflation money tied to high fertilizer prices, corn remains very attractive. The idea that lower prices would cut out production didn’t happen. Instead, they encourage more production as we try to out-bushel the lower prices. Regarding the report, corn production remained essentially unchanged; with a lower yield and higher acreage, production went up by 13 million bushels. The impressive takeaway is that even before this marketing year starts, the USDA feels confident enough to raise new crop exports by 75 million bushels. Usually, when the USDA raises production, they find ways to raise demand, and vice versa. This indicates strong sales on the books and was one of the most bullish factors of the report.
Todd Gleason: Mike Zuzolo, following up on that, I would think part of that had to be based on developments in the Black Sea, with Russia and Ukraine attacking ports and causing issues with corn and wheat exports.
Mike Zuzolo: Yes and no, Todd. The wheat market still has a lot of control over corn. Crude oil and the wheat market are becoming more similar because we cannot determine true supplies in either. For example, some people in Ukraine talk about moving 1.5 million tons of grain over road and rail compared to 4.5 to 5.5 million tons by the Black Sea. However, that is not moving the markets because the trade sees Ukrainian and Russian FOB wheat prices at a 2.5 to 3.5-year low. We have conflict and infrastructure destruction, but the rally is in freight and insurance outside normal trade parameters. Wheat is literally holding corn back right now. The major drought Western Europeans faced looks like it will migrate into Ukraine and clip corn production potential. While soft red wheat is up about 25% year-to-date, corn prices on the lead month are barely a nickel higher than on December 31st.
Todd Gleason: Jim, did you look at the global numbers as they related to exports to see if what we are seeing in the news corresponds to expectations for crop size or movement?
Jim McCormick: They did lower exports out of Ukraine, Todd, but the USDA just took a baby step. The rhetoric coming out of that part of the world suggests it will get aggressive. You saw volatility when Ukrainians offered a peace deal to stop shooting at each other’s grain ships. We will see if the Russians accept. The market is having a hard time digesting things due to the fog of war. The wheat is there; the question is whether it can be exported efficiently.
Todd Gleason: How concerned, and Ted, I will start with you, should the grain trading world be regarding the Black Sea, the Iran-US conflict, the movement of grain into the Middle East, and the potential issues that could create later this fall?
Ted Seifried: Without getting too political, Jim, I think creating unrest and having citizens rise up due to food shortages is part of what we are trying to achieve as a country. Targeting infrastructure is part of that. For global grain trade, the big question remains the movement of fertilizer. South America is moving quickly towards their next season. You wonder what the availability will be for that second-season corn crop in Brazil. The USDA and South American agencies are cutting acreage and crops for next year partly because of that, and because a super El Niño continues to build, likely peaking right in the heart of the Argentinian and Brazilian growing seasons. We are facing a relatively tight corn balance sheet for the United States. If South America has major issues, we could see a record-breaking corn export program. Add to that the issues in France, where the USDA lowered the EU’s production number by 3.5 million metric tons and increased their exports. We could have a very interesting setup for corn in the January to March timeframe.
Todd Gleason: Mike, if you could pick up on that and talk about fertilizer across the planet, particularly nitrogen and urea coming out of the Strait of Hormuz, and issues related to diesel fuel for transportation.
Mike Zuzolo: Diesel is easier to book right now for the fall, Todd. One reason there is enough crude oil on the market is because Ukraine has been highly effective against Russian refineries. The diesel export ban from Russia is why I believe wheat and crude are tightly linked both geopolitically and fundamentally. Diesel is not going to go down at this point. I have believed since late last year that this is very similar to the 1980s when we took on Iran and the Soviet Union, and the US buckled them. I do not think that is as likely this time. Vladimir Putin and the leadership in Iran see this as an existential fight to the end. The market is not used to dealing with that, which is why I favor locking in diesel. The Middle East and the Black Sea will continue to be a thorn in our side through the midterm elections, and the trade is not ready for that.
Todd Gleason: Jim McCormick, put this into perspective for me regarding yesterday’s USDA numbers. Do we have a corn crop trending lower or a big crop getting bigger? And how does global conflict impact corn prices compared to weather?
Jim McCormick: The next couple of weeks will impact crop size. If ratings stay stagnant or improve, the crop could get slightly bigger. Statistically, when ratings stay steady or improve from August onward, the crop size increases. However, south of here, heat and warm nights will not help. I do not think it will move much one way or another, Todd. One or two bushels will not have a huge impact. I agree with Mike; the conflict is not ending anytime soon. The Iranians have stated their goal is to drag this out through the midterms or the rest of the Trump Administration. Fertilizer availability is a crapshoot. World stocks-to-use are at levels we haven’t seen in 12 or 13 years, so supply is tightening. We have a massive 18 billion bushel total supply coming at the market this fall, but in the long run, due to global uncertainty and a contentious midterm election, end users will likely hedge aggressively. Any hint that South American production will fall short could move this market into a big bull run. China is hoarding energy; there is abundant crude oil but a lack of availability to turn it into diesel and gasoline. This has been masked by drawing down global stocks, and inflation could drive more money into the grain market.
Todd Gleason: Ted, should we pay attention to the 20-cent jump in corn on the day of the USDA report, and the subsequent dime loss?
Ted Seifried: There was a lot of volatility. Part of that 20-cent gain came from spillover strength in wheat and concerns about the Black Sea. A lot of the bullishness from the report was the USDA increasing new crop exports early, which is a major vote of confidence in our export business. The question now is yield. I am going on the Pro Farmer crop tour next week and have conflicting thoughts. We will look at dry conditions in the west, but there were mild temperature stretches in July when parts of Iowa may have completed pollination favorably. We haven’t touched on soybeans, but that report was rather bearish with 1.4 million acres added. Over the last few years, we have seen record pod counts but lacked weather to finish them out. This August is different; two-thirds of the growing area has received rain, which might provide an ideal finish. The market will be in a yield debate until the September report.
Todd Gleason: Mike Zuzolo, do you want to talk about yesterday’s soybean numbers from USDA?
Mike Zuzolo: Ted hit an important point. Beans have always been the leader to the downside, except for soybean oil refining capacity increases and the EPA 45Z. That will become an issue again as we likely hit all-time highs in diesel next quarter. The potential size of the bean crop is critical. If you dovetail that with President Xi and President Trump’s meeting in September, it could bring beans back to being the downside leader. After the report and the Black Sea developments, grains and cattle share similar dynamics. They are in weather markets, and the downside is more in futures, while the cash market is well-supported. I advise clients to focus on hedging on paper and leave cash alone, as it is underpinned by tightening supplies.
Todd Gleason: Anything from you, Jim McCormick, on the bean figures?
Jim McCormick: The size of the crop will be the determining factor. Finding a bushel or two due to favorable August weather relieves stress on the tightening balance sheet, and we can handle China coming in to buy. If the crop is not there and China buys the full 25 million metric tons the White House announced, the balance sheet tightens quickly. El Niño affecting South American production could tighten it further. I agree with Mike; hedge on paper and hold on to physical product going into winter.
Ted Seifried: If I can chime in on that, I think there is a debate about whether the USDA is incorporating that 25 million metric tons of US soybeans to China on their current domestic balance sheet. The USDA doesn’t break out exports by country, but they go by policy in place. They have said they are respecting the trade deal made last October as policy in place. We have to assume they are using that 25 million metric tons in their current balance sheet. What that means is the rest of the world is at 13-year lows. If China buys from us, it displaces demand to Brazil. But if the rest of the world performs better than expected, that’s where growth in soybean exports could come. Unless we see China buying above the 25 million metric tons, you have to take the USDA’s export projections for what they are.
Todd Gleason: Mike, Jim, and Ted, do you think the trade has that 25 million imports from China built into the futures price at this point?
Mike Zuzolo: I think so, Todd, because the USDA remains well above China’s total import number. I think they are carrying 105 or 106.
Jim McCormick: I honestly don’t know, Todd. I have heard people say they have only put 15 or 16 million metric tons into the balance sheet because the tariffs currently in place don’t allow the private sector to buy it. It will happen when a deal is done. China will agree to buy what they need, and President Trump will likely lower tariffs because we are spending $5 billion a day in deficit spending, making tariffs less significant.
Ted Seifried: Whether the 25 million metric tons is accounted for globally is interesting. The USDA report has Brazil exporting 118 million metric tons of their 186 million metric ton crop. That is a constant number. Down the balance sheet of global exporters, those numbers make sense regardless of whether exports go to China or elsewhere. It all works out on a global balance sheet.
Todd Gleason: As we wrap up, I would like you to begin each of your final thoughts this way: are you neutral, friendly, bearish, or bullish on corn and/or soybeans? Mike Zuzolo.
Mike Zuzolo: Price-friendly on corn. We are at a 5-year low on world stocks-to-use and just a hair away from a 5-year low in US stocks-to-use. Wheat is supportive. Soybeans, I am neutral.
Todd Gleason: Jim McCormick.
Jim McCormick: Friendly on corn, though it will take time getting through harvest. Any problems in South America due to El Niño will make it more bullish. I am more neutral on beans. There is underlying support due to South American uncertainty and elevated diesel demand.
Todd Gleason: And Ted Seifried.
Ted Seifried: I will start with wheat; very situational. We need to see exports come to us, and we haven’t seen that. For corn, I want to be bullish. The August USDA report often sets the highs, but longer-term, corn is set up for an interesting start to the next calendar year. For soybeans, I am negative. The yield and balance sheet have potential to go higher. I don’t think we can add much to the demand side. I worry that soybean carryover could get closer to 450 million bushels.
announce: Commodity Week is a production of Illinois Public Media, public radio for the farming world. You may find and listen to our programs anytime at willag.org. Our thanks to our panelists: Mike Zuzolo at GlobalCommResearch.com in Atchison, Kansas, Ted Seifried from ZanerAgHedge.com in Chicago, and Jim McCormick of AgMarket.net in Barrington, Illinois. I am University of Illinois Extension’s Todd Gleason.