Eyes on Grain Flow, River Flow and Acre Flow

The global situation for corn remains dominated by uncertainty about the future of the grain corridor agreement in the Black Sea, extremely high energy and fertilizer costs, and relatively tight feed grain inventories.

In the U.S., the dominant factors for old crop corn remain the very difficult basis environment and weak exports, which are keeping prices in check. New crop prospects are dominated by input prices and South American prospects – and a breakeven environment that will likely lean toward more corn acres than soybean.

Global Situation Should Offer Selling Opportunities

I continue to believe that the grain corridor will remain intact and functioning due to pressure from Russia’s few remaining allies. Leading up to the current agreement’s expiration in mid-March, there will again be threats, but these should be seen as selling opportunities.

The fuel and fertilizer situation is unlikely to change much in early 2023 as winter weather and the Ukrainian war prevent the world from building distillate (diesel and heating oil) or natural gas inventories. The net of these factors involving Russia and Ukraine is supportive to U.S. grain prices, but there will remain an air of nervousness for change in the coming months.

Wide and unusual basis expected through Q2 2023

Basis levels remain extreme in the U.S. In western Kansas and the Texas Panhandle, positive basis of $1.00 to $1.50 remains very common, and positive basis levels of $0.30 stretch into northwest Iowa and southeast South Dakota. One of the drivers of this anomaly is textbook basis fundamentals: Basis exists to allow supply and demand to be more local than a futures market allows. Creating an incentive to move grain from surplus to deficit regions is a primary function of basis. In a year in which the western Corn Belt had sub-par yields, and even Iowa and Minnesota yields were very uneven, supplies in the West are simply smaller. Cattle feeders are having to pay larger premiums to either outcompete other users in Nebraska, Iowa and Minnesota, or to make shipping corn over longer distances profitable.

A second factor driving wide basis levels is the higher cost of diesel fuel. With diesel fuel prices continuing to be elevated, the price difference needed to justify grain movement is larger than typical.

The final piece of basis is difficulty shipping down the Mississippi River The river’s low water levels have slowed the pace of movement of grain down the river, increasing the cost. Because corn futures prices are based on Illinois River delivery points, futures price weakens relative to domestic consumption.

Spring thaw and rains should replenish the Mississippi come April, but diesel is likely to remain high until spring, and crop availability will not change until next fall. Therefore, wide and unusual basis will be with us for the rest of the 2022-23 marketing year.

Slow Exports and Acre Expectations Remain Biggest Threats to Corn Prices

Export sales remain far behind the pace implied by current USDA export forecasts. Even if exports accelerate to an above-average pace for the remainder of 2022, and even after the cut in projected exports in the January WASDE report, a cut in exports of 50 million to 150 million bushels will probably be necessary, putting ending old crop stocks in the 1.3 billion to 1.5 billion bushel range, compared to the 1.24 billion of January. This justifies at least a 25- to 50-cent downward move; however, the market likely somewhat anticipates the situation, resulting in a smaller move.

Early estimates of $6.00-breakeven prices for 2023 corn and $14.00-breakeven prices for soybeans almost ensure that 2023 will be a challenging year. With cotton prices much weaker than last year, I expect to see corn and soybean acreage increase, even with firm prices for wheat and hay. The relative price for new crop corn has increased compared to new crop soybeans, such that more of those acres may flow to corn.

Reminder on Selling 2022 Crop

With higher interest rates and therefore higher cost of storage this year compared to past years, very large basis gains are needed for storage to pay. I talked about this in more detail in a video. The May-July spread remains inverted, and the March-May spread has had only small carries. A very weak export market is threatening the level of futures prices, and the market is signaling to sell cash with its spread action. If you continue to store old-crop corn, you should carefully assess what it will take to make storage profitable this year.