Wheat Rally Continues, China Scrambling to Source Commodities

The next shoe to drop? "China is scrambling to source commodities in the face of Black Sea terminal closures"

Sharing something on my morning "must read" list from Farm Futures daily report, an Informa publication, along with a great chart from @Bloomberg.

The following was written and is 100% sourced to Farm Futures daily report written by @Jacquie Holland and @Ben Potter:

"The latest from Ukraine: Russia continues to target residential areas in Ukraine as fighting continued overnight. Energy markets continue to rise as global markets scramble to determine how to potentially replace Russian oil production and exports going forward.?Brent futures surged above $111/barrel this morning on the prospects while West Texas Intermediate contracts followed closely behind, just below the $110/barrel benchmark.

"Oil has been pushing higher on growing perceptions that Russian oil is unable to be ‘transacted’," ED&F Man Capital Markets analyst Edward Meir told Reuters overnight. "Although oil is not technically under sanction, traders are understandably nervous about taking delivery of Russian crude, let alone storing, shipping and ultimately selling it."

The potential good news about the Russian-Ukrainian conflict (if there is any to be had)? There is a chance that the U.S. Federal Reserve could scale back anticipated interest rate increases this month as the ongoing military action roils international financial markets.

Meanwhile, we need to be asking more questions about what China is doing during this time.

The answer: scrambling to stock up on commodities that may be rendered inaccessible if the West continues to levy economic sanctions on Russia, who has become a critical trade partner with China in recent years.

China bought about 29% of its total corn imports from Ukraine last year. It also sourced 1.6% of its iron ore purchases from Ukraine’s Black Sea terminals. About 30% of China’s sunflower oil purchases last year were sourced from Russia, with the rest supplied by Ukraine.

China has doubled its purchases of Russian oil over the past five years, making Russia nearly as big of an oil supplier to China as Saudi Arabia.

Government agencies are pushing buyers to buffet state stocks of oil, gas, iron ore, barley, and corn with additional supplies that could run short during the ongoing Russian-Ukrainian conflict. A Bloomberg report notes that availability is more important for China than price, “indicating the cost of imports isn’t a focus right now.”

The Russian conflict presents significant growth challenges for China’s economy, just as peak demand season approaches for many raw materials that could be stalled due to Black Sea export terminal closures. China’s National People’s Congress begins this weekend, so we could see more measures to safeguard the Chinese economy emerge in the coming days.

Are there early signs the U.S. stands to benefit from being one of the few countries with exportable grain supplies available? Yes.

"Global buyers of grains have been increasingly turning to the U.S., Europe or South America to secure supplies in the immediate term, given the ongoing conflict," ING told Reuters. "Moreover, demand for stockpiling has also increased due to current uncertainty."

Corn: Profit takers swooped into the corn markets overnight to take advantage of $7/bushel corn, sending futures prices $0.03-$0.06/bushel lower by this morning. Losses were capped by ongoing fears that Ukraine’s corn crop may not be planted this year or at the least will likely see catastrophic production shortfalls as Russia’s military conflict in Ukraine continues.

High corn prices took a toll on monthly corn consumption volumes for ethanol in January, according to data released yesterday from USDA. For the month of January 2022, over 474.0 million bushels of corn were consumed for ethanol production.

That value drifted 0.8% lower than December 2021 volumes, which totaled 477.9 million bushels. It was the second largest January corn usage rate for ethanol on record, trailing only 2017/18’s January volume of 476.1 million bushels.

The January dip in corn consumption rates for ethanol is not unusual, however. December typically sees the highest production value of the year thanks to holiday travel activity. In the last seven years, January volumes have always come in lower than December volumes to the average tune of 2%.

Corn growers can take solace in the fact that the January 2021-December 2022 corn consumption rates for ethanol production only saw an 0.8% decrease month over month, suggesting that while fuel prices remain high, profit opportunities still exist for ethanol producers and thus, corn growers.

The U.S. Energy Information Administration (EIA) releases updated weekly ethanol values today. Weekly production volumes have been reported at a narrow range between 41.7 million gallons/day – 44.2 million gallons/day of output since the 2022 calendar year began.

Today’s report will not likely deviate from that trend as gasoline demand returns to pre-pandemic volumes and fuel prices remain elevated in the face of the Russian-Ukrainian conflict. Expect today’s weekly ethanol production volumes to remain comfortably within that range for another week.

Soybeans: Profit takers also hit up the soybean complex this morning, taking $0.04-$0.13/bushel off of yesterday’s rallies. Nearby soybean futures contracts dipped just below the $17/bushel benchmark on the overnight losses while new crop futures lost a bit of momentum on their race to the $15/bushel benchmark.

USDA also released monthly soy crush volumes for January 2022 yesterday. For the month, soy crush volumes totaled 194.3 million bushels, down 1.4% from the record-setting December 2021 volume of 198.2 million bushels as high prices squeeze processor margins.

All things considered, yesterday’s report was as bullish as it could be in the face of high commodity prices that are pressuring processing margins. The volume bested the pre-report trade average of 193.7 million bushels, though remained comfortable at the higher end of the analyst estimate range of 193.0 million – 194.3 million bushels.

The January 2022 crush trails January 2021 volumes of 196.5 million bushels as the second-largest January crush volume on record. But it is still an impressive haul – the January 2022 crush is the fifth largest monthly soy crush in recorded U.S. history.

Similar to corn processing for ethanol, soy crush volumes are showing early signs of demand rationing as processors begin to balk at high soybean input prices. As prices soared in February amid South American crop shortfalls and the Russian invasion into Ukraine, growers can expect to see more declines in basis as processors struggle to maintain adequate margins amid high soybean input prices.

Wheat: Constrained global wheat supplies due to the Black Sea military conflict kept wheat prices rallying overnight. Minneapolis wheat touched $11/bushel this morning and could go higher as global spring wheat supply availability remains in question during Russia’s invasion into Ukraine.

Kansas City and Chicago wheat futures also charged comfortably above the $10/bushel benchmark this morning. The dollar also strengthened, though it did not appear to be a limiting factor in this morning’s wheat rally. It marked a new 14- year high for Chicago wheat prices.

"Ukraine had announced at the beginning of the week that it would be keeping its Black Sea ports closed until the end of the Russian invasion, meaning that no wheat shipments can be sent from Ukraine by sea for an indefinite period," Commerzbank said in a note.

"Russia is also likely to find it difficult to export wheat because hardly any ships will be willing to travel into the crisis region, and insurance companies will doubtless demand significantly higher premiums to cover this."

Weather : Warm weather is returning back to the Heartland after last week’s wintery spell, according to NOAA’s short-range forecasts. Mostly clear skies are forecast across the Midwest today, though the Northern Plains could see a chance for a wintery precipitation mix falling late this evening.

Financials: U.S. equity indices inched up overnight on a round of bargain buying amid the Russia-Ukraine conflict."