Author: Aaron Smith

Global commodity markets have been affected by the Russian invasion of Ukraine on February 24, 2022. Energy prices have skyrocketed.  The American Automobile Association estimated the national average gas price in the United States at $4.32/gallon on March 10. Implications of the conflict are far reaching, affecting nearly all aspects of the global economy. Agricultural producers have been affected on two fronts, input prices (fuel, fertilizer, etc.) and commodity prices (wheat, corn, and soybeans). The focus of this article is the impact on grain and oilseed markets and marketing tools that producers may want to consider to help mitigate price risk.

Ukraine is an important producer and exporter of wheat, corn, barley, and sunflower seed products.  Table 1 shows Ukraine’s share of world production and their share of world exports for these commodities. While Ukrainian corn represents only 3.5% of world production, it accounts for 13.8% of world exports.  Meanwhile, Ukraine produces almost a third of the world’s sunflower seed, which is then turned into about half of the world’s meal and oil exports.  Sunflower seed oil production and exports in Ukraine have some ramifications for soybean oil and soybean prices as imperfect substitutes.

Table 1. Ukraine’s Share of World Production and Exports for Select Commodities, 2021/22

	Wheat	Barley	Corn	Sunflower Seed	Sunflower Seed Meal	Sunflower Seed Oil
Production	4.2%	6.8%	3.5%	30.6%	27.5%	30.6%
Exports	9.8%	16.7%	13.8%	4.8%	58.0%	47.3%

Source: USDA PSD https://apps.fas.usda.gov/psdonline/app/index.html#/app/home

Volatility in corn, wheat, and soybean futures markets have been extreme (Figures 1-3). For example, daily price changes for July wheat for the past ten trading days have been: -75, 67, 50, 74.25, 75, 59, 77.25, -57.25, -85, and -67.5 cents. Extreme volatility can make marketing decisions challenging and potentially expensive. However, volatility also often provides opportunities for profit. Three months ago, every farmer would have jumped at the ability to sell wheat futures at $9.00; now farmers can set a futures price floor at $9.62. Purchasing put options is expensive – $1.48 for an at-the-money put as of March 9. However, with a gap between the fall crop insurance price of $7.14 and current market offerings of $11.10, taking some additional downside risk off the table while leaving the top side open is a prudent move.

Corn and soybean projected crop insurance prices were set 10 days ago at $5.90 and $14.33, respectively. Harvest futures prices on March 10 were $6.50 for corn and $14.95 for soybeans, an increase of 60 and 62 cents, respectively. Producers should be asking themselves at what point they should take some additional price risk off the table. Being too aggressive with setting prices (i.e. cash forward contracts and short hedges) should be approached cautiously as producers need to avoid exchanging price risk for production risk or selling their way out of a bull market. However, managing the downside price risk should be on every producer’s mind, particularly with input prices at elevated levels.

Grain and oilseed markets are likely to remain unpredictable, due to uncertainty generated from the Russia-Ukraine conflict. Producers should consider how much of the 2022 crop they are comfortable pricing at this point in the year and how they can protect the downside of this market while keeping the upside open. Options strategies will be expensive but should be fully explored based on current market conditions.

Figure 1. Daily July Wheat Futures, January 3 to March 10, 2022

References and Resources:

USDA – Foreign Agricultural Services. Production, supply, and distribution (PSD). Accessed at: https://apps.fas.usda.gov/psdonline/app/index.html#/app/home

Barchart.com. Corn soybean and wheat historical futures prices. Accessed at: https://www.barchart.com/futures/grains?viewName=main

AAA – https://gasprices.aaa.com/

Smith, Aaron. “Ukraine-Russia Implications in Grain and Oilseed Markets“. Southern Ag Today 2(12.1). March 14, 2022. Permalink

Soybean prices have maintained their bullish momentum into 2022. The March soybean futures contract closed at $15.52 ¼ on February 15, which is up $2.03 ¼ since the start of the year. Numerous factors have propelled prices higher, including drought in South America, global economic recovery, and very strong domestic crush margins. United States domestic soybean crush has been at a record pace and the current crush margin, well above $2.00/bushel, will continue to support domestic soybean prices. Additionally, the current global reserves of soybean’s two primary products – soybean meal and soybean oil – are also very supportive of soybean prices. The three largest producers of soybeans are Brazil, the United States, and Argentina. The largest importer of soybeans is China; however, the rest of the world (ROW) maintains a substantial portion of soybean meal stocks – 46.7% in 2021/22 (Figure 1) and soybean oil 40.4% in 2021/22 (Figure 2). 

Since the 2019/20 marketing year, global soybean meal stocks have decreased from 14.54 million metric tons (MMT) to 12.27 MMT, a 15.6% decline in two years. The decrease in soybean meal stocks is largely attributed to declines in Argentina (16.4%) and ROW (27.2%) (Figure 1). Over the same time, global soybean meal consumption has increased from 240.5 MMT to 247.5 MMT. Increasing meal demand and lower meal stocks will continue to support soybean meal and soybean prices.

Figure 1. Global Soybean Meal Stocks by Country, 2006/07-2021/22

Similar to soybean meal, soybean oil also has lower stocks compared to recent years. USDA projects global soybean oil stocks at 3.719 MMT, down 22.4% compared to the 2019/20 marketing year (Figure 2). Soybean oil stocks have dropped 50.6% for Argentina, 34.2% for ROW, and 23.1% for China. Global soybean oil consumption has increased from 57.2 MMT, in the 2019/20 marketing year, to 60.2 MMT projected for the 2021/22 marketing year. Lower soybean oil stocks and increased demand will continue to support high soybean oil and soybean prices.

Figure 2. Global Soybean Oil Stocks by Country, 2006/07-2021/22

A great deal of uncertainty continues to be prevalent in the soybean complex. However, there are numerous reasons to be cautiously optimistic that high soybean prices will continue in 2022. Low stocks of soybean oil and meal are one of the factors that will be supportive for soybean prices.

References

U.S. Department of Agriculture Foreign Agriculture Services (USDA FAS). 2022. Production, Supply, and Distribution (PSD). Accessed online at: https://apps.fas.usda.gov/psdonline/app/index.html#/app/home

Smith, S. Aaron. “Soybean Meal and Oil Stocks Supportive for High Soybean Prices“. Southern Ag Today 2(9.1). February 21, 2022. Permalink

Corn prices are outside producers’ control, marketing is not. Corn prices are influenced by domestic and global supply and demand, government policies, and money flows between asset categories. While it is important for corn producers to understand and monitor factors influencing global and national prices, it is equally important to understand local market conditions and sale opportunities that can substantially increase average cash sales price. 

In general, corn prices in the Southeast are higher than the national average (Table 1 and Figures 1 and 2). Of the four states analyzed North Carolina and Texas had the highest five-year average cash price, however all four states had five-year average monthly prices greater than the national average. 2021 presented a slightly different picture with Kentucky having lower prices in six months than the national average. Additionally, both Tennessee (September) and North Carolina (August) had months with state average prices below the national average.

While Southeast corn prices are generally higher, it is important that producers understand seasonal trends, returns to storage, and historical basis to consistently obtain a higher cash price.  This is primarily due to strong demand from poultry, livestock, ethanol, distilleries, and proximity to export markets through Mississippi River terminals or ocean ports. However, tremendous variation exists between states and within states based on prevailing local supply and demand. As such, understanding local market conditions is essential. Three basic considerations that should be factored into every corn producer’s marketing plan are:

1. Typical harvest period– Harvest interval will vary by location and will influence when early harvest premiums may become available. Harvest timing can vary from year-to-year due to planting and weather, so it is important to account for both “typical” harvest timing and current growing season influences.
2. Storage – For many Southeast producers, storage is one of the most effective marketing tools. Storage can help mitigate production risk and extend the marketing interval. Storing the crop allows producers to know what they have to sell before committing to a final cash price. It is important to note that this does not eliminate the need for in-season price risk management tools (ie. options and crop insurance). Not having to sell the crop at harvest typically avoids seasonal price lows in futures markets and basis.
3. On-demand sales opportunities – Due to high demand for corn in many locations, producers who have storage can also have the ability to meet on demand requests, for a price premium, for large corn end users. To access these markets, producers need to be on the end user’s contact list to obtain emergency or short turnaround corn supplies and be able to deliver corn quickly (trucking requirement).

Producers should utilize their knowledge of local supply and demand factors to extract the highest cash price possible. Developing a marketing plan and risk management strategy that factors in national price trends and local market conditions will aid in achieving higher prices in local markets. 

Table 1. Average Monthly Corn Prices

Figure 1. Five-Year Monthly Average Corn Prices for Select Southeast States Minus the National Average

Figure 2. 2021 Monthly Average Corn Prices for Select Southeast States Minus the National Average

Smith, Aaron. “Variation in Corn Prices in the Southeast.” Southern Ag Today 2(6.1). January 31, 2022. Permalink

Historically, the harvest futures price from December 1 to March 31 can be a key predictor of planted acreage for spring crops. From 2010 to 2021, the monthly average futures price from December 1 to March 31 for soybeans (SX) divided by corn (CZ) has been 2.39, and corn (CZ) divided by cotton (CTZ) has been 5.85. A soybean-to-corn price ratio below 2.39 would tend to favor planting corn over soybeans and a corn-to-cotton price ratio above 5.85 would favor corn over cotton (Figure 1). So, with relative prices favoring corn and cotton, should we expect a reduction in soybean acres in 2022? Maybe not. 

Figure 1. December 1 to March 31 monthly average futures closing price ratio for the harvest contract (December = Corn; Soybeans = November; and Cotton = December), 2010-2022*

Commodity price ratios may not dictate producer decisions on what to plant in 2022. Instead, input cost and availability may be the driving force. High input crops, like cotton and corn, are at a disadvantage compared to lower input crops like soybeans and sorghum. High input prices reduce profit margins, and potential lower input availability increases production risk. 

Using fertilizer as an example, retail prices (Figures 2 & 3), are up 62-176% compared to last November. To put this in context, from 2010 to 2020 for the Mississippi Portal Region, USDA ERS estimates the cost of fertilizer to be 4.49 times more expensive for an acre of corn than for an acre of soybeans and 2.64 times more expensive for an acre of cotton compared to an acre of soybeans. As such, a doubling in fertilizer prices can add $100-150 or more per acre to producer’s production costs for corn, whereas for soybeans, fertilizer costs may only go up $20-35 per acre with a doubling of fertilizer prices. Producers will need to estimate profitability and risk for each commodity when making planting decisions. 

Figure 2. Select weekly fertilizer prices November 2019 to November 2021

Figure 3. Select weekly fertilizer prices November 2019 to November 2021

Smith, Aaron. “Input Price and Availability is Influencing 2022 Planting Intentions“. Southern Ag Today 2(3.1). January 10, 2022. Permalink

Soybean value is derived from two products: oil and meal. In general, a 60-pound bushel of soybeans produces 48 pounds of soybean meal and 11 pounds of soybean oil with 1 pound of processing waste. To estimate crush margin, the following calculations can be used: 

Soybean meal value ($/bu) = Soybean meal price ($/ton)/2,000 x 48 lb/bu^[1]

Soybean oil value ($/bu) = Soybean oil price (cents/lb)/100 x 11 lb/bu

Crush margin ($/bu) = (Soybean meal value + Soybean oil value) – Soybean price ($/bu)

The crush margin is an estimate of gross margin for a soybean processor and can be used as an indicator of profitability. Figure 1 depicts the monthly nearby soybean futures price and the monthly crush margin. Since January 2006, the average futures market crush margin has been $1.46/bu with a minimum of $0.90 and a maximum of $3.18. As of October 13, 2021, the crush margin was $2.08 indicating an above average gross margin or an incentive to crush (this may be partially diminished due to increased costs to operate soybean crush facilities due to COVID-19 and labor/logistical issues). 

But what is driving this incentive? Looking at the data shows that the percent of value derived from meal and oil changed in April 2021. For the first three months of 2021, soybean meal was 65% of the soybean value, the same as the January 2006 to October 2021 average. However, since April this ratio has moved in favor of oil with the October 2021 estimate of 54% of soybean value attributed to meal and 46% to oil (Figure 2). There are two primary reasons for increased soybean oil value. First, increased vegetable oil demand and lower stocks are causing the number of global days-on-hand (stocks divided by daily average consumption) to drop from 41.7 days in the 2020/21 marketing year to 38.5 days projected for the 2021/22 marketing year. The second factor is current and potential demand for biodiesel derived from soybean oil. Energy prices have risen dramatically this year, and the federal government has emphasized continued development of biodiesel as a renewable fuel.

So, what does this tell us about prices? Soybean meal futures prices have declined since the start of the year, dropping from $417.60/ton in January 2021 to $312.90/ton in October 2021. Conversely, soybean oil futures have increased from 44.62 cents/lb to 58.62 cents/lb. Over the same time, soybean futures have dropped from $13.70/bu to $11.88/bu. While strong demand for soybean oil has helped support soybean prices, it is likely that soybean meal will drive prices and gross returns to farmers moving forward.  As such, even if soybean oil prices continue to strengthen, the soybean meal market will likely need to establish a floor (or increase in value) for soybean prices to resume a strong upward trend.

Figure 1. Monthly Nearby Soybean Futures Contract Price and Crush margin, January 2006 to October 2021 (Calculated based on futures data from: barchart.com)

Figure 2. Meal and Oil Value per bushel of Soybeans, January 2006 to October 2021 (Calculated based on futures data from: barchart.com)

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^[1] There are two common approaches to estimating the quantity of soybean meal: (1) the one depicted above, 48 lbs of soybean meal at (44% protein) or (2) 44 lbs of soybean meal (48% protein), which is used by CME group.

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Smith, Aaron. “What’s Driving Soybean Value: Meal or Oil?” Southern Ag Today 1(44.1). October 25, 2021. Permalink