Author: Hunter Biram

The Black Sea Grain Deal made it possible for Ukraine to continue to ship goods amid the Russia-Ukraine conflict. On August 1, 2022, five months after the Russian invasion of Ukraine, the first Ukrainian grain ship left the port of Odesa, marking a time when Ukraine safely exported grain, fertilizer, and other products. On July 17, 2023, nearly a year after its implementation, Russia left the deal and will no longer abide by the rules set in place by the Black Sea Grain Deal. We look at which agricultural markets will be impacted and provide implications for each market. 

Ukraine ranked 3^rd among global competitors for corn exports but is projected to fall to 4^th in the 2023/2024 marketing year while ranking 7th in production (USDA-FAS, 2023). Ukrainian corn exports accounted for 15% of global exports in the 2022/2023 marketing year and are projected to drop to 9.6% in the 2023/2024 marketing year (Figure 1).  Despite Ukraine’s relatively high ranking in the corn export market, global ending stocks are projected to increase from 11.71 billion bushels to 12.36 billion bushels, carried by a projected record production of 15.27 billion bushels in the United States. Russian corn exports accounted for a smaller portion of total exports at 2.4% of global exports during the 2022/2023 marketing year, with corn exports projected to fall to 2.1% of global exports in the 2023/2024 marketing year.

The top 3 wheat exporters in the world are Russia, the European Union, and Canada, while Ukraine ranks 7th among global competitors (USDA-FAS, 2023; Figure 2). Ukrainian wheat exports accounted for 7.5% of global exports in the 2022/2023 marketing year and is projected by USDA to drop to 5.0% in the 2023/2024 marketing year. Russian wheat exports accounted for 21% of global exports in the 2022/2023 marketing year and is projected by USDA to increase to 22% in the 2023/2024 marketing year. 

According to the Food and Agricultural Organization, Russia ranks 1st, 2nd, and 3rd in Nitrogenous, Potash, and Phosphate fertilizer exports. At the same time, Ukraine only accounts for 2% of Nitrogenous exports and a smaller amount of Phosphate and Potash fertilizers.  Fertilizer prices increased at the start of the Russian-Ukraine conflict due to Russian supply shocks. Russia’s exports and production are expected to be uninhibited by the Black Sea deal. The same holds for Russian ally Belarus, the third largest global potash exporter behind Russia and Canada.

The initial cancellation of the grain deal on the 17^th did not significantly affect futures as the market likely already accounted for the cancellation. We saw a small rally in the futures prices for corn, soybeans, and soft red winter wheat that returned to market-open price levels by market close. However, Russia escalated Ukrainian export problems on July 18^th by launching a missile strike on the Port of Odesa. Some reports indicate that critical port infrastructure was destroyed, and Russia is trying to stop grain exports (Reuters & The Hill, 2023). Continued attacks on Ukrainian ports could cause supply shocks, increasing the volatility of markets speculating on U.S. crop conditions and weather. Combining the recent missile strikes with a fall in forecasted July precipitation, the harvest-time futures price of corn and wheat have increased by $0.40 and $0.70, respectively, as of July 19th. Recent gains in wheat prices are likely due more to the Ukraine/Russia situation than weather while corn is a combination of both. Moving forward, markets will likely be affected by the Russian/Ukrainian conflict, weather, and crop conditions, increasing price volatility.

Approaching harvest 2023, producers should take advantage of relatively higher corn prices now, before the weather risk premium associated with speculation on weather and crop conditions reduces to zero. As September approaches and winter wheat harvest progresses, the wheat price typically falls due to an influx of market supply and rebounds after the glut of harvest supplies exits the market.

Figure 1. Global Corn Exports by Country (Marketing Years 2019/2020 to 2023/2024)

Figure 2. Global Wheat Exports by Country (Marketing Years 2019/2020 to 2023/2024)

References:

Hunder, Max, and Olena Harmash. “Kyiv Says Russia Attacks Grain Infrastructure with Strikes on Ukraine’s Odesa Ports | Reuters.” Reuters. Accessed July 19, 2023. https://www.reuters.com/world/europe/russia-strikes-ukraines-odesa-port-hellish-attack-official-2023-07-19/.

Robertson, Nick. “Russian Missiles, Drones Strike Odesa Port Just as Grain Export Deal Set to Expire.” Text. The Hill(blog), July 19, 2023. https://thehill.com/policy/international/4105251-russian-missiles-drones-strike-odessa-port-just-as-grain-export-deal-set-to-expire/.

Biram, Hunter, and Grant Gardner. “Implications of the Black Sea Grain Deal Cancellation.” Southern Ag Today 3(30.1). July 24, 2023. Permalink

Photo by Pixabay: https://www.pexels.com/photo/sunset-cereals-grain-lighting-39015/

Grain and oilseed producers in the Midsouth experienced record low soybean basis, which is the cash price less futures price, in October 2022 due to reduced barge traffic and record high barge freight rates along the lower Mississippi River. These factors were associated with soybean basis as weak as 125 cents under the harvest time futures contract which was nearly one dollar below the 5-year average of 28 cents under for the month of October.  In a previous Southern Ag Today article, Biram et al. (2022) noted the primary reason soybean basis values fell to historic lows was because grain buyers at local elevators were pushed to bid lower cash prices for soybeans to compensate for the additional cost to transport grain from the elevator to the port of New Orleans for export. Further, grain buyers essentially had no place to store the grain even if they wanted to buy it which supports the principle of offering lower cash prices to disincentivize farmers from making delivery.

While we witnessed the association of record-low basis with record-low river levels in the lower Mississippi River last fall, we are now witnessing an association of relatively lower basis and record-high river levels in the upper Mississippi River due primarily to snow melt. As the Mississippi River level increases to flood-level stages, barge traffic is limited as locks and dams along the river are closed, preventing the transportation of grain downriver or empty barges upriver. On April 16th, the Mississippi River gauge height at McGregor, IA, reached 16 feet which is considered a minor flood stage by the United State Geological Survey (USGS, 2023). On April 20th, the gauge height measured at the same location reached a moderate flood stage of 19 feet. On April 28th, the gauge height was measured at 23 feet, above major flood stage of 22 feet, which is the greatest gauge height reported since April 26, 2019, when it measured 22 feet. 

Soybean basis reported in locations along the lower Mississippi River began to diverge from historical trends on April 10th and continue throughout the month of April. Consider the case of soybean basis at Elaine, AR, which is representative of basis reported in other southern states in the region (Figure 1). In this example, I consider the basis for 2023 delivery at harvest time which is the difference of the forward cash price and the November 2023 soybean futures contract (ZSX23). The first reported drop in this specific soybean basis was on April 10th with a fall from 25 cents over to 18 cents over which suggests a local response to the rising upper Mississippi River levels (Figure 1). This weakening of basis is associated with the increase in river gauge height throughout the month of April despite the relatively strong 4-year average basis for years in which the gauge height at McGregor, IA, did not reach moderate or major flood stage (i.e., 2018, 2020, 2021, and 2022). The most recent period basis fell below zero in April was in 2019 when it consistently stayed near 40 cents under which is another period in which the upper Mississippi River experienced record-high levels.

The river level in the upper Mississippi River is starting to fall and with it will most likely come relatively stronger soybean basis in the Midsouth if the historical association between these two variables continues. Additionally, forward cash prices typically reach their strongest in early summer before declining as we approach the harvest months. One implication for a grain marketing plan would be to consider holding off on the May forward contracting decision for 2023 harvest-time delivery until the latter part of the month in anticipation of recovery in the  soybean basis.

Figure 1. Spring Soybean Basis at Elaine, AR and Mississippi River Gauge Height at McGregor, IA (2018-2023)

Note: The Nonflood Four-Year Average is calculated using the years when the gauge height at this location did not reach moderate or major flood stage.

References

Biram, Hunter, John Anderson, Scott Stiles, and Andrew McKenzie. “Low Water Levels in the Mississippi River Result in Abnormally Weak Soybean Basis“. Southern Ag Today 2(45.1). October 31, 2022. Permalink

Report-Arkansas Daily Grain Bids | MARS, https://mymarketnews.ams.usda.gov/viewReport2960

Mississippi River at Mcgregor, IA – 05389500, United States Geological Survey. May 3, 2023.https://waterdata.usgs.gov/monitoring-location/05389500/#parameterCode=00065&timeSeriesId=43560&startDT=2023-04-01&endDT=2023-04-30

Biram, Hunter. “Flooding in the Upper Mississippi River is Associated with Relatively Weak Soybean Basis in the Midsouth.” Southern Ag Today 3(21.1). May 22, 2023. Permalink

Photo by Tom Fisk: https://www.pexels.com/photo/mississippi-river-during-golden-hour-14819622/

On Friday, March 31^st, USDA released the Prospective Plantings report. These acreage estimates are based primarily on surveys conducted by the National Agricultural Statistics Service (NASS) during the first two weeks of March. Principal crop acres planted were projected nationally at nearly 312 million acres, up roughly six million acres compared to last year. Corn acres are estimated at 92.0 million, up 3.42 million from last year. Soybean planted acres are estimated at 87.5 million, up slightly from last year by 55 thousand acres. Cotton acres are projected to be down 18% from last year, at 11.3 million acres. Peanut acreage is projected at 1.55 million acres, up 7% from last year, and rice area is projected at 2.58 million acres, up 16% from last year. All wheat acreage is projected at 49.86 million, up 9% from last year. Projections from the Prospective Planting results are comparable to recent projections released at the February USDA Outlook Forum which had March projections calling for 1 million more acres of corn, no difference in soybean acres, and 500,000 fewer acres of cotton. 

The market expected more corn acres in 2023 compared to last year. Corn plantings were held back in 2022 due to high fertilizer prices, which have been alleviated slightly, allowing for a rebound in acreage.  Cotton was expected to struggle to retain acres this year due to struggling demand and lower prices compared to other commodities. Every state, besides Arizona, is projected to remain steady or see a decrease in cotton acreage from last year. Rice acres are seeing a rebound on higher prices, but a forecast of wet weather in the Midsouth over the next couple of weeks could lower plantings. Price reaction from the report was mixed, with harvest contract corn unchanged, soybeans 10-15 cents higher, cotton 0.40 cents lower, and rice unchanged.

How reliable are the March prospective planting numbers? The NASS planted acreage projections across the U.S. generally hold well with low predictive error and hold especially well for corn and soybeans (Figure 1). There appears to be a larger error, albeit still quite small, when predicting planted acreage for cotton and rice. This is likely for two reasons stemming from the fact that cotton and rice are grown primarily in southern states.  The larger variance can be due to (1) the smaller sample size of farms and (2) the alternative crops available to plant in place of corn and soybeans. Most of the U.S. corn and soybean acreage is grown in the upper Midwest but tends to take up acreage across the entire U.S. which allows for a larger sample of farmers and less variance. In the south, farmers rotate corn and soybean crops with cotton, peanuts, and even some vegetables.  This makes it more difficult to project acres that may shift based on rotational needs, commodity prices, input costs, and weather.  

One way to investigate the difficulty in projecting acreage is by choosing the subsample of southern states to see if 1) there is more variance across the changes in corn and soybean acreages given a smaller sample and 2) the pattern of acreage changes across cotton and rice still holds in the subsample. We find this to be true (Figure 2). We see more differences each year between prospective and actual planted acreages in corn and soybeans across southern states, and the general pattern of differences each year for cotton and rice still holds between the full U.S. sample and the southern subsample. This implies that we should generally not expect any significant changes in harvest price expectations driven by differences in planted acreages but rather look to future market-moving events.

Figure 1. Comparison of Prospective vs. Actual Planted Acreage across the U.S. (2014-2023)

Figure 2. Comparison of Prospective vs. Actual Planted Acreage across Southern^[1] States (2014-2023)

^[1] States included are Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia.

Biram, Hunter, and William E. Maples. “Key Takeaways and Reliability of the 2023 Prospective Plantings Report.” Southern Ag Today 3(14.1). April 1, 2023. Permalink