A recording of the interview between Eric Atkinson and Daniel O’Brien can be listened at the following address on the www.AgManager.info website: https://www.agmanager.info/news. Following are the supportive working slides and notes for the Weekly Grain Market Review from Kansas State University:
You-all are invited to a grain market update and pre-harvest marketing strategies webinar we at Kansas State University are having on Monday, May 16th over the noon hour – free of charge. See the registration information on the www.AgManager.info website in the post below. Our primary focus will be on corn markets, but will discuss the broader wheat, soybean and grain sorghum market landscape as well.
Tight global grain supplies leading to fears of wide spread food shortages. These market worries have caused high and volatile wheat, corn, sorghum and soybean markets in Spring 2022. However, historically strong “new crop” forward prices have not made farmer’s 2022 crop marketing choices any easier or less risky. Sizable production risk still exists in the U.S., Brazil and in Eastern Europe along with historic harvest price uncertainty.
A webinar on these issues will be presented on Monday, May 16th over the noon hour (12:00-1:00 p.m. central). This online meeting will examine key factors currently affecting grain markets, and the likelihood of strong grain markets into Summer-Fall and beyond. Also, a representative farm 2022 “scale up preharvest corn marketing strategy” will examined. Grain sorghum, soybean and HRW wheat 2022 marketing strategies will also being considered.
This webinar is presented by the Kansas State University Department of Agricultural Economics, with the presenters Mark Nelson of Kansas Farm Bureau and Daniel O’Brien of KSU.
The following comments and graphics illustrate the state of the U.S. & World wheat market at the end of year 2021 – heading into 2022.
Some of the key factors to consider for the Wheat market heading into year 2022 are as follows:
Key Issue:Tight“World Less-China“ & World Wheat Supplies + Other Supply/Demand Risks
Strong World & U.S. wheat markets are occurring primarily because of extremely tight World Less-China and World aggregate wheat percent (%) ending stocks-to-use at the start of year 2022.
And, with World wheat markets already being historically tight, the threat of geopolitical problems in the Black Sea region between Russia & Ukraine (potentially disrupting key World wheat trade suppliers) and ongoing production risk in North America (impacting hard red winter, white, hard red spring and durum varieties again in 2022), the existing tight World stocks situation entering the year is providing strong support for U.S. and World wheat markets.
Projected “World-Less-China” wheat % ending stocks-to-use in “New Crop” MY 2021/22 is estimated to be 21.4% (137.01 mmt ending stocks / 640.85 mmt total use), down from an estimate of 23.3% in “Old Crop” MY 2020/21 (145.52 mmt ending stocks / 624.62 mmt total use). These levels of “World-Less-China” % ending stocks-to-use are the lowest in 14 years, since 17.54% in MY 2007/08 (89.14mmt ending stocks / 508.38 mmt total use). The USDA wheat marketing year lasts from June 1st to May 31st each year.
This tight supply-demand balance “World-Less-China” wheat market perspective illustrates the tightness of World Wheat supplies even more so than aggregated World wheat supply demand perspectives – which are tight in their own right.
Projected “World” wheat % ending stocks-to-use in “New Crop” MY 2021/22 is estimated to be 35.2% (278.18 mmt ending stocks / 789.35 mmt use), down from an estimate of 37.4% in “Old Crop” MY 2020/21 (289.34 mmt ending stocks / 774..62 mmt use).
These levels of “World-Less-China” % ending stocks to use are the lowest in 6 years, since 34.6% in MY 2015/16 (246.94 mmt ending stocks / 712.84 mmt ending stocks).
USDA estimates of Chinese wheat usage has increased from 105,500 mmt in MY 2007/08 up to 148,500 mmt in MY 2021/22 – an increase of 2.86% (+3,036 mmt) each marketing year. This compares to Chinese’ ending stocks increasing 18.53% (+7,278 mmt) each year.
In this instance, the food security policy of China which motivates them to build domestic stockpiles of grain to forestall any food shortages is reflected in these numbers.
2. U.S. Domestic Supply-Demand Factors in 2022
Tight U.S. wheat stocks-to-use and buyer’s market worries of the adequacy of market supplies throughout the remainder of the “New Crop” 2021/22 marketing year (September 1, 2021 – August 31, 2022) are supporting U.S. wheat market prices – (a situation very similar to U.S. feedgrain markets).
2a) U.S. Wheat Production
Overall U.S. wheat production of 1.646 bb in MY 2021/22 is down 10% from 1.828 bb in MY 2020/21, and down 15% from 1.932 bb in MY 2019/20.
Tightening U.S. supply-demand balances in “New Crop” MY 2021/22 are the result of reduced year 2021 production of hard red spring wheat (297 mb – down 44% vs 2020), white wheat (201 mb – down 34%), and durum wheat (37 mb – down 46%), which were partially offset by increases in hard red winter wheat (749 mb – up 14%) and soft red winter wheat (361 mb – up 36%).
2b) U.S. Wheat Use
Price rationing has occurred in regards to U.S. wheat exports, although other U.S. wheat usage factors have remained unchanged or stronger.
Food Use (assuming a consistent U.S. economy and consumer demand for bread / flour products) – 962 million bu. projected in MY 2021/22. Food use is essentially unchanged from the previous to years.
Exports – 840 million bu. projected in MY 2021/22. This USDA projection of 840 mb for MY 2021/22 was lowered 20 mb from the November WASDE, and is down from 992 mb in “Old Crop” MY 2020/21, and from 969 mb in MY 2019/20. The USDA projection would equal the current pace of U.S. wheat exports through the first 28 weeks of “New Crop” MY 2021/22 (i.e., 16.7 mb/week) projected through the remaining weeks of the year – equaling approximately 850 mb total U.S. wheat exports.
Seed Use – U.S. seed use in MY 2021/22 is projected slightly higher at 66 mb, vs 60 mb and 64 mb in the MY 2019/20, and “Old Crop” MY 2020/21, respectively. This marginal increase likely reflects U.S. farmer’s anticipated response to high wheat prices by increasing seeded acres in 2022.
Feed and residual use – 135 million bu. projected in “New Crop” MY 2021/22. The USDA apparently anticipates that higher feedgrain prices will attract more wheat to be fed. However, this remains to be seen, as U.S. wheat prices are competively high themselves for livestock feeders to consider.
2c) Ending Stocks & % Ending Stocks-to-Use
In the December 9, 2021 USDA World Agricultural Supply and Demand Estimates (WASDE) the USDA projected U.S. wheat ending stocks of 598 million bushels (mb) after an estimate of 2.003 bb total use, with % ending stocks-to-use of 29.86% in “New Crop” MY 2021/22.
These % stocks-to-use projections are trending down sharply from 40.03% S/U in “Old Crop” MY 2020/21, and 49.21% S/U in MY 2019/20.
2d) U.S. Wheat Prices
The USDA projected that the U.S. wheat farm price would average $7.05 /bu in “New Crop” MY 2021/22, up sharply from both $5.05 /bu in “Old Crop” MY 2020/21, and $4.58 /bu in MY 2019/20.
The projection of $7.05 /bu in “New Crop” MY 2021/22 is the highest in 9 years, since $7.24 & $7.77 /bu in MY 2011/12 & MY 2012/13, respectively.
Comment: Whether the North American crop production areas that were harmed by drought in 2021 fully recover or not may be the most important factor to watch in the 2022 U.S. wheat market. Plus, dryness has emerged in the central and southern plains area of the U.S. – where hard red winter wheat is grown. So, at this time, the resolution of these dry wheat production conditions (or not) will likely be a key issue driver in North American wheat markets in the coming year.
3. Risk Factors Impacting the North American Flour Milling Industry in 2022
Short supplies of key North American wheat crops in 2021 – much less a decline in quality from drought damage – placed U.S. wheat millers in a challenging situation in the last year. If these same hard red spring, white and durum wheat production areas remain drought-affected in 2022, plus dry conditions impact the hard red winter wheat areas to the south, then U.S. wheat millers will have even more of a challenging situation again in the coming year.
Regarding wheat quality, the 2021 Australian wheat crop was large but of poor quality due to excessive rainfall. Market discussion is that China may have bought a fair quantity of the feed quality wheat from Australia in recent weeks.
However, there is still the issue of short supplies of food quality wheat for the World wheat export market resulting from Australian production problems. This has a “tightening supplies” impact on World wheat markets seeking food quality wheat.
4. Finishing Comments
The worries of U.S. wheat domestic and international users about having adequate U.S. wheat supplies for in year 2022 are likely to continue to support U.S. wheat markets through at least spring 2022, and likely on into late June-July (i.e., the time of the U.S. hard red winter wheat market). Then, if 2022 U.S. wheat production prospects are promising (i.e., 1.85-2.0 billion bushels or more), then wheat market prices are vulnerable to a decline into late summer-fall 2022.
Higher wheat production costs for the year 2022 from fertilizer and pesticide cost inflation seems not as likely to impact U.S. spring planted wheat acreage as they do for feedgrains (especially high yielding – crop input intensive corn). It could be a situation in spring 2022 where lack of availability of fertilizer for feedgrain planting needs may cause farmers to seed more wheat – which generally requires lower amounts of Nitrogen fertilizer to reach profit maximizing levels of yield.
For all crops to be grown in year 2022, there is greater than usual geopolitical risk in U.S. grain markets in general in 2022. It is likely that all crop markets will exhibit greater than usual volatility in year 2022, presenting a challenging environment for U.S. wheat producers to protect profitability levels during this time.
The following comments and graphics illustrate the state of the U.S. grain sorghum & World coarse grain markets at the end of year 2021 – heading into 2022.
Key U.S. grain sorghum & World coarse grain factors to consider heading into year 2022 are as follows:
A. U.S. Sorghum Exports – Balancing “slow” shipments with optimistic export prospects
Strong U.S. grain sorghum markets are supported by both high U.S. corn market prices, and anticipated strength in the U.S. grain sorghum exports to China during the remainder of – “New Crop” MY 2021/22 (September 1, 2021 through August 31, 2022).
Over the first 17 weeks of “New Crop” MY 2021/22 through December 23, 2021, a total of 60.6 million bushels (mb) of U.S. grain sorghum has been shipped for export, at an average of 3.56 mb in actual shipments per week. To meet the USDA’s projection of 320 mb for MY 2021/22. U.S. grain sorghum exports will need to average 7.41 mb per week.
A total of 208.6 mb of U.S. grain sorghum export shipments & commitments (adding 60.6 mb of shipments plus 148 mb of forward purchases) through December 23, 2021 equals 65.2% of the USDA projection of 320 mb for “New Crop” MY 2021/22 with 17 of 52 weeks of the marketing year (32.7% completed).
KSU Observation: Indications are that U.S. grain sorghum exports so far in “New Crop” MY 2021/22 are behind pace to meet USDA projections. The pace of exports of U.S. grain sorghum is a major issue to monitor through the winter and spring of 2022. If it turns out that U.S. grain sorghum exports will fall short of the USDA projection of 320 mb in MY 2021/22, which – all else being equal – would lead to a weakening of U.S. grain sorghum market prices.
B. USDA U.S. Grain Sorghum Supply-Demand Factors & Trends
In the December 9, 2021 USDA World Agricultural Supply and Demand Estimates (WASDE) the USDA projected U.S. grain sorghum ending stocks of 37 million bushels (mb) after an estimate of 455 mb total use, with % ending stocks-to-use of 8.13% in “New Crop” MY 2021/22, up from 5.22% S/U in “Old Crop” MY 2020/21, and from 8.00% S/U in MY 2019/20.
The USDA projected that the U.S. grain sorghum average farm price would equal $5.45 /bu in “New Crop” MY 2021/22, up from both $5.04 /bu in “Old Crop” MY 2020/21, and $3.34 /bu in MY 2019/20. The projection of $5.45 /bu in “New Crop” MY 2021/22 is the highest since $5.99 – $ 6.32 /bu in MY 2011/12 – 2012/13.
Just as with U.S. corn, what would typically be normal, annual U.S. grain sorghum market uncertainty about 2022 U.S. grain sorghum production providing adequate U.S. sorghum supplies in late summer & fall of 2022, has been exacerbated by high cost of fertilizer and other key crop inputs. Higher feedgrain input costs could either 1) reduce the acres of U.S. feedgrains planted in 2022, or 2) lower the productivity (amount of feedgrains produced per acre due to less fertilizer and other key inputs applied). The impact of higher corn and grain sorghum input costs wont likely be answered until the 2022 spring planting season.
C. Other U.S. Grain Sorghum Domestic Supply-Demand Factors
A number of U.S. grain sorghum supply-demand factors are likely to prove important to the U.S. grain sorghum market in 2022. These factors include ….
1) Feed and Residual use – 135 million bu (mb) projected in “New Crop” MY 2021/22, compared to 99 mb in “Old Crop” MY 2020/21, and 172 mb in MY 2019/20.
2) U.S. Food, Seed & Industrial usage in 2022 (assuming a strong U.S. economy and gasoline use) – 10 million bu. projected in MY 2021/22 – indicating how high U.S. grain sorghum prices have discouraged U.S. grain sorghum bioenergy and other domestic uses (besides U.S. feed & residual use).
3) Exports – 320 million bu. projected in MY 2021/22- with reliance on imports from China and a few other much smaller U.S. export customers. The potential for dry conditions in South America and/or the Black Sea region in 2022 would impact all U.S. corn market price prospects as well as those of U.S. grain sorghum.
D. Historically Tight “World-Less-China” Coarse Grain % Stocks-to-Use
Projected “World-Less-China” coarse grain % ending stocks-to-use in “Old Crop” MY 2020/21 is estimated to have been 10.1%, down from the estimate of 10.2% in “New Crop” MY 2021/22.
Similar to World corn supply-demand trends, these levels for World coarse grains are down from 14.8% in MY 2016/17, and at their lowest since at least MY 2007/08 – providing support for World and U.S. Coarse Grain Prices
E. Finishing Comments
Factors supporting U.S. feedgrain markets during the start of year 2022, will also support corn’s competitor – grain sorghum. However, to the degree that U.S. grain sorghum exports are “strong”, grain sorghum prices will be either moderately stronger or weaker than corn through the coming months of 2022.
The following comments and graphics illustrate the state of the U.S. domestic corn market at the end of year 2021 – heading into 2022.
Key factors to consider for the U.S. corn marketing heading into year are as follows:
A) Heightened Systematic U.S. & World Economic Risk 2022
Factors such as the potential return of COVID-19 and associated U.S. government public health-related actions pose a risk to the U.S. and World economy in 2022, with potential carryover impacts on all U.S. agricultural commodity markets in general, and U.S. corn markets in particular.
In addition, U.S. corn and other grain markets could be impacted by potential U.S. government policy actions during the upcoming congressional election period (Fall 2022) such as proactive moves to control currently high U.S. inflation by the U.S. Federal Reserve.
World geopolitics in an increasingly unsettled environment where fears of destabilizing aggressive actions by China, Russia, Middle Eastern, and other countries exist could also impact U.S. corn and other grain markets. To the degree that international tensions could impact U.S. corn and other grain exports, U.S. corn markets could be significantly affected.
Overall, there is heightened systematic economic risk for the U.S. corn and other grain markets heading into year 2022 than has existed in recent years.
B. Existence of a “High Price” 2022 U.S. Corn Market Until Proven Otherwise
Tight U.S. corn stocks-to-use and buyer’s market worries of the adequacy of market supplies throughout the remainder of the “New Crop” 2021/22 marketing year (September 1, 2021 – August 31, 2022) are supporting U.S. corn market prices.
In the December 9, 2021 USDA World Agricultural Supply and Demand Estimates (WASDE) the USDA projected ending stocks of 1.493 billion bushels (bb) after an estimate of 14.830 bb total use, with % ending stocks-to-use of 10.07% in “New Crop” MY 2021/22, up from 8.34% S/U in “Old Crop” MY 2020/21, but down from 13.74% S/U in MY 2019/20.
The USDA projected that the U.S. corn average farm price would average $5.45 /bu in “New Crop” MY 2021/22, up from both $4.53 /bu in “Old Crop” MY 2020/21, and $3.56 /bu in MY 2019/20. The projection of $5.45 /bu in “New Crop” MY 2021/22 is the highest since $6.22 – $ 6.89 /bu in MY 2012/12 – 2012/13.
What would typically be normal, annual U.S. corn market uncertainty about 2022 U.S. corn production providing adequate U.S. corn supplies in late summer & fall of 2022 have been exacerbated by high cost of fertilizer and other key crop inputs. Higher corn input costs could either 1) reduce the acres of U.S. corn planted in 2022, or 2) lower the productivity (amount of corn produced per acre due to less fertilizer and other key inputs applied). The impact of higher corn input costs wont likely be answered until the 2022 spring planting season.
C. Other U.S. Domestic Supply-Demand Factors
A number of other U.S. corn supply-demand factors are likely to prove critical to the U.S. corn market in 2022. These factors include continued strength in….
1) Feed and residual use – 5.650 billion bu. projected in “New Crop” MY 2021/22
2) U.S. ethanol usage in 2022 (assuming a strong U.S. economy and gasoline use) – 5.250 billion bu. projected in MY 2021/22
3) Exports – 2.500 billion bu. projected in MY 2021/22- with reliance on imports from China, Mexico, Japan, Columbia, Canada and other countries. The continuing possibility of dry production conditions in major U.S. export competitors Brazil, Argentina, and Ukraine in 2022 provide support for U.S. corn market price prospects.
4) Wet Corn Milling & Other Non-Food, Seed & Industrial Use – 1.430 bb in MY 2021/22
D. Historically Tight “World-Less-China” Corn % Stocks-to-Use
Projected “World-Less-China” corn % ending stocks-to-use in “Old Crop” MY 2020/21 is estimated to have been 10.2%, down from the estimate of 10.6% in “New Crop” MY 2021/22.
These levels are down from 15.9% in MY 2016/17, and the lowest since 9.5% from MY 2011/12 – MY 2012/13.
E. Finishing Comments
The worries of U.S. corn domestic and international users about having adequate U.S. Corn supplies for in year 2022 are likely to continue to support U.S. corn markets through at least spring 2022, and likely on into late June-July. Then, if 2022 U.S. corn production prospects are promising (i.e., 15 billion bushels or more) then corn market prices are vulnerable to a decline into fall 2022.
Higher corn production costs for the year 2022 U.S. corn crop pose a great risk to U.S. farmers corn profitability prospects in the coming year, especially if a potential decline in U.S. corn market prices occurs in fall 2022 as indicated above.
It should not be forgotten that there is greater than usual geopolitical risk in U.S. grain markets in general, and U.S. corn markets in particular in 2022. It is likely that corn markets will exhibit greater than usual volatility in year 2022, presenting a challenging environment for U.S. corn producers to protect profitability levels during this time.
Market & Profit Calculations Through October 22, 2021
Daniel O’Brien, Professor & Extension Agricultural Economist – Kansas State University
October 25, 2021
A. Ethanol Price and Profitability Trends
Ethanol Sales Prices (per gallon): The selling price of ethanol via tank car and truck shipment out of Iowa ethanol plants is estimated to have averaged near $2.29 / gallon during September 2021, and $2.38 / gallon during October 1-22, 2021. This compares to $1.21 /gallon during September 2019-August 2020 (MY 2019/20), and $1.71 per gallon in during Sept. 2020-Aug. 2021 (“old crop” MY 2020/21).
Corn Input Purchase Prices (per bushel): During the September and October 1-22, 2021 periods, corn input purchase prices for Iowa ethanol plants are estimated to have averaged $5.61 and near $5.21 /bu., respectively. This compares to $3.42 /bu. during September 2019-August 2020 (MY 2019/20), $4.53 during September 2020-August 2021 (“old crop” MY 2020/21), and a USDA projection of $5.45 /bu in “new crop” MY 2021/22.
DDGS Sales Prices (per ton at 10% moisture): During the September and October 1-22, 2021 periods, distillers dried grains (DDGS) (10% moisture)for Iowa ethanol plants are estimated to have averaged near $184 and $181 per ton, respectively. This compares to near $140 /ton during September 2019-August 2020 (MY 2019/20), and $195 per ton during September 2020-August 2021 during “old crop” MY 2020/21.
Ethanol Cost of Production (per gallon): During the September and October 1-22, 2021 periods, cost of productionfor Iowa ethanol plants is estimated to have averaged near $2.06 and $1.92 per gallon, respectively. This compares to near $1.35 /gallon during September 2019-August 2020 (MY 2019/20), and $1.92 /gallon during September 2020-August 2021 in “old crop” MY 2020/21.
Profitability of Ethanol Production (per gallon): Using an Iowa State University model and applying price estimates from Kansas State University, ethanol plants in Iowa were operating on average at estimated profits of $0.23 and $0.47 per gallon during September and October 1-22, 2021, respectively. Ethanol plants in the U.S. had been operating unprofitably since August 2018, with average loses of -$0.18 /gallon in the 2018/19 U.S. corn marketing year (September 2018-August 2019), -$0.14 /gallon during September 2019-August 2020 (MY 2019/20), and -$0.17 /gallon during “old crop” MY 2020/21 (September 2020-August 2021).
B. Ethanol Production & Stocks Trends
U.S. Ethanol Production: Since the beginning 7 weeks of the “new crop” 2020/22 marketing year (MY) for U.S. corn on September 1, 2021 through October 15, 2021, U.S. ethanol production has averaged 972,000 barrels per week (b/w) – with a range of 914K for the week ending September 24th to 1,096K b/w for the week ending October 15th. At this average pace throughout the remaining 45 weeks of “new crop” MY 2021/22, U.S. ethanol production would reach 14.905 billion barrels in “new crop” MY 2021/22. Further, at a rate of 2.83 gallons of ethanol per bushel of feedgrain used for ethanol production (corn and/or grain sorghum), a total of 5.266 billion bushels (bb) of feedgrains would be used for ethanol production in the current marketing year.
The USDA’s latest World Agricultural Supply and Demand Estimates (WASDE) report on October 12, 2021 have a forecast that in “new crop” MY 2021/22 a total of 5.200 bb of U.S. corn would used in domestic ethanol production, and that 10 million bushels (mb) of U.S. grain sorghum would be used for Food, Seed, and Industrial (FSI) uses – which includes industrial ethanol production as well as seed use.
At this time, combined U.S. corn and grain sorghum use for ethanol production in “current crop” MY 2020/21 (i.e., for the September 1, 2020 through August 31, 2021 period) is on pace to be 5.267 billion bushels, up 1.1% from the USDA’s combined feedgrain projection of 5.210 billion bushels.
U.S. Ethanol Stocks: United States’ ethanol stocks have averaged 20,084,143 barrels per week since the beginning of the “new crop” MY 2021/22 in early September 2021 – through October 15, 2021. This weekly average of U.S. ethanol stocks is down 5.85% from the previous 12 month marketing year average for MY 2020/21 of 21,332,096 barrels per week (b/w).
U.S. ethanol ending stocks the week of October 8, 2021 of 19,931,000 barrels were the lowest level since stocks of 19,588,000 barrels on May 28, 2021, and 18,980,000 barrels on May 21, 2021 – helping to support ethanol market prices.
Following are some graphics on U.S. Ethanol Market price and profitability trends. This information is available at the following KSU AgManager web-address:
On Monday, June 7th the Kansas State University Department of Agricultural Economics and the International Grains Program provided a webinar to Southeast Asian audiences interested in U.S. corn and grain sorghum market perspectives, and the outlook on U.S. Ethanol Profitability with associated Distillers Grains product availability in the near term.
A copy of this presentation which also includes an initial discussion of U.S. Ethanol and Distillers grains market prospects is found at the following web address on the KSU www.AgManager.info website:
The graphics in this presentation are targeted for both domestic U.S. and international grain market audiences, with prices represented in both domestic U.S. and international metric units. Acreages and supply-demand quantities are also presented in both english and metric units in alternative graphics.
The session dealt in particular on the current U.S. and World market outlook of corn and grain sorghum during a time of tight supplies and uncertainty about U.S. and World feedgrain supply-demand and price trends for the remainder of calendar year 2021. The session also focused on current profitability prospects in U.S. ethanol plants, and the likelihood of continued availability of U.S. DDGS (distillers dried grains and solubles) for export into the Southeast Asia region.
The following information stands out in assessing the Kansas, U.S. and World grain market data through 3/27/2021:
The impressive recovery rally in grain futures lead by Corn on Thursday, May 27th – regaining all of the price decline that had occurred since May 20th.
Strength in all cash corn prices & basis in Kansas – with current spot cash prices ranging from $6.81 to $7.24 /bu on 5/27/2021 at key regional elevator locations across the state. Spot corn basis “spiked” stronger within the last few weeks – likely following the roll over in lead basis determining month from CME MAY 2021 to CME JULY 2021 corn futures.
“New Crop” MY 2021/22 corn forward contract bids ranged within $5.26-$5.90 per bushel at the same locations that day – down in a range of $1.34-$1.87 /bu from spot cash bids.
This spot vs new crop bid difference infers that the U.S. grain market expects a successful – sizable U.S. corn crop in year 2021, and that grain prices will move sharply lower into the 2021 fall corn harvest in the U.S..
Continued strong Grain Sorghum (Milo) cash prices in Kansas – BUT which have now trended lower than corn prices in the state in all regions EXCEPT in the southeast part of the state. It appears that demand pull for grain sorghum toward livestock feeding areas in Missouri and Arkansas are heavily impacting sorghum prices in the southeast part of the state. However, unlike for corn, grain sorghum spot market basis bids in Kansas have continued to trend sideways – likely indicating the dependence of local cash milo markets on Chinese import demand (which has been “good” but now “great” in recent weeks.
“New Crop” MY 2021/22 grain sorghum forward contract bids ranged within $5.60-$6.15 per bushel, which was $0.24-$0.88 /bu higher than “new crop” corn forward contract bids at the same locations that day.
Continued High Cash Wheat Prices – even with impending wheat harvest in June-July. As prospects for the 2021 Hard Red Winter Wheat crop in Kansas have drastically improved with recent rains, the wheat market has not declined precipitously. Spot cash wheat basis in Kansas has showed no signs your of seasonal harvest weakening – but that may still occur in coming weeks once harvest begins in earnest.
Extremely tight “current” MY 2020/21 U.S. feedgrain supplies seems to be incentivizing U.S. wheat feeding – which is particularly relevant in western Kansas feedlot areas.
Cash wheat prices at major Kansas markets are 85%-93% of cash corn prices on a per bushel basis, while being 79%-86% of cash corn prices on a per lb basis after lb per bushel adjustments (i.e., assuming 60 lb per bushel for HRW wheat vs 56 lb per bushel for corn).
High 5/27/2021 soybean price closes of $15.37 /bu (CME JULY 2021), $14.87 1/4 for AUG 2021, $14.11 1/2 for SEPT 2021, & $13.78 1/4 for NOV 2021 Soybean futures. Cash soybean prices at selected major Kansas regional locations range within $14.97-$15.32 /bu, with spot soybean basis being very strong as well in recent weeks as basis determination has rolled from CME MAY 2021 soybeans to CME JULY 2021.
However, “new crop” MY 2021/22 forward contract bids ranged within $12.88-$13.28 /bu – down $1.71-2.38 from spot cash prices.
This difference indicates that the soybean market in aggregate expects a successful U.S. soybean crop in year 2021 – and moderately lower prices in Fall 2021 a harvest.
Unique grain market forces and dynamics across the state of Kansas
Strong corn feed demand in western Kansas – especially in the southwest with its concentration of beef feedlots – is driving corn prices higher relative to both sorghum (export demand driven) and wheat. However, the wheat / corn price ratio in the southwest part of the state is likely providing a strong incentive for feeding wheat to livestock.
Strong corn and sorghum feed demand in southeast Kansas – likely indicating strong feed demand pull from Missouri and Arkansas.
Dr. Mattos makes good points on 1) alternative outcome scenarios to be prepared for, 2) how hedging is about risk management, 3) cash flow implications from possible futures margin calls, 4) why margin calls don’t necessarily mean the hedge is unprofitable, and 5) considerations for lifting grain hedges early.
Good, timely work by Fabio Mattos – a valued colleague and agricultural economist from UNL.
The Wild Side of Commodity Markets: Hedging in Times of High Volatility
Commodity markets go through periods with low volatility when we generally see small variations in prices, as well as periods with high volatility, when we tend to see large swings in prices. Regardless of the degree of price volatility in the market, producers can always use marketing contracts as a way to hedge the price risk of their operation. Even though the general mechanics of hedging are the same in periods of low volatility and high volatility, some aspects of hedging become more evident in times of high volatility. In this article, we will discuss some of these aspects focusing on hedging with futures contracts.
Futures contracts are one of many marketing contracts that we can use to hedge the price of our commodities. When we sell in the futures market, we are locking in the futures price for delivery in a given month in the future, which eliminates futures price risk. Regardless of what happens with the futures price between now and the delivery month, our futures price is already locked in and we know exactly what it will be at delivery time. On the other hand, the basis remains open when we hedge with futures contracts. Therefore, we are able to eliminate futures price risk (which is relatively large) but we still carry basis risk (which is relatively small).
For example, let us say that last fall a grain producer was planning to store some soybeans to sell in May 2021 and she decided to hedge it using futures contracts for May 2021 delivery. On October 7, 2020 this producer sold her grain using the soybean futures contract for May 2021 delivery at $10.30/bu. Let us also assume that, based on her historical records, she was expecting a basis of -$0.60/bu in May. In this case, she was looking at a realized price of $9.70/bu upon delivery in May (=locked-in futures price plus expected basis). As long as the actual basis in May is really -$0.60/bu, she will receive $9.70/bu upon delivery. As for the futures price, it is already locked in and she does not need to worry about it anymore.
Let us think of two scenarios with high volatility to discuss this hedge
Scenario 1: The futures price goes down during the hedge (between October 2020 and May 2021). Hypothetically, let us imagine that we go through a period of high volatility and the spot price offered by the local elevator in the producer’s cash market turned out to be $6.00/bu in May 2021 and the futures price was $6.60/bu, giving us a basis of -$0.60/bu. The producer would then sell her grain in her cash market for $6.00/bu and offset her futures contracts. She would buy back the futures contract at the current price of $6.60/bu and leave the futures market with a profit of $3.70/bu (sold at $10.30/bu when the hedge was placed, bought at $6.60/bu when the hedge was lifted). In total, the producer would receive $9.70/bu, i.e. $6.00/bu from the local elevator plus $3.70/bu gained in the futures market. In this scenario, the producer made money in the futures market, which helped her offset the lower price in her cash market. Since the basis at delivery was as expected, the producer ended up receiving $9.70/bu as anticipated at the beginning of the hedge.
Scenario 2: The futures price goes up during the hedge (between October 2020 and May 2021). Again let us imagine that we go through a period of high volatility and the spot price offered by the local elevator in the producer’s cash market turned out to be $15.85/bu in May 2021 and the futures price was $16.45/bu, giving us a basis of -$0.60/bu. The producer would then sell her grain in her cash market for $15.85/bu and offset her futures contracts. She would buy back the futures contract at the current price of $16.45/bu and leave the futures market with a loss of $6.15/bu (sold at $10.30/bu when the hedge was placed, bought at $16.45/bu when the hedge was lifted). In total, the producer would still receive $9.70/bu, i.e. $15.85/bu from the local elevator minus $6.15/bu lost in the futures market. In this scenario, the producer lost money in the futures market, which did not allow her to benefit from the higher price in her cash market. Since the basis at delivery was as expected, the producer ended up receiving $9.70/bu as anticipated in the beginning of the hedge.
Take-away point #1: hedging is about risk management When prices went up during the hedge in Scenario 2, the producer could have received a higher price without the hedge. If she had not used futures contracts to hedge her grain, she would have just sold to the local elevator in May for $15.85/bu and would have had no loss in the futures market. However, without the hedge, she would have been carrying price risk, which means that she could have made more money as prices went up just as likely she could have made less money if prices had gone down. Without the hedge, the producer would be wondering whether she would be able to receive $15 per bushel for her grain (as in Scenario 2), or if she would end up receiving just $6 per bushel (as in Scenario 1). When we do not hedge, we are fully exposed to the ups and downs of prices in the market.
When we hedge with futures contracts (or any other type of contract), we need to remember that we are doing that to reduce our risk. Hedging is about risk management, which means that we will not be able to take advantage of higher prices in case the market goes up but we will be protected against lower prices in case the market goes down. There is no way to get around this trade-off. If we do not hedge because we want to be able to hit a home run and sell at the highest price of the season, we will be exposed to the ups and downs of the market and we may as well end up selling at the lowest price of the season. If we want to reduce our price risk and get protection against lower prices, we will not be able to benefit from higher prices in case the market goes up. We need to be comfortable with this idea when we make a decision to hedge.
Take-away point #2: there are cash flow implications of margin calls in the futures market When we hedge using futures contracts, we have to deal with the margin system in the futures market. There are good reasons for the existence of the margin system in the futures market, which is beyond the point of this article. What matters here is that we need to post an initial margin deposit when we start our futures hedge and then we are subject to margin calls during the hedge. Margin calls are additional deposits to our margin account in case we are losing money in the futures market. Essentially, the general idea behind margin calls is to make sure that all participants in the futures market will keep a minimum balance in their accounts and hence will still be able to honor their contracts regardless of how much money they may be losing.
In our example in Scenario 2, as the futures price was increasing between October 2020 and May 2021, our producer was losing money in the futures market with her short position. Let us assume that the producer was hedging 30,000 bushels with futures contracts for May 2021 delivery. As the futures price increased from $10.30/bu when the hedge was placed on 10/6/2020 to $16.45/bu when the hedge was lifted on 5/11/2021 (Figure 1), the producer received margin calls in 47 days out of the 149 days of the hedge for a total of $184,500 in margin calls (Figure 2).
As we can see in Figure 2, in the 47 days with margin calls during this hedge, the value of the additional deposits that the producer had to make ranged from $300 to $12,750. Just as an exercise, if we divide the total value of margin calls ($184,500) by the number of margin calls (47), we would be looking at an average value of $3,925 per margin call. This has important cash flow implications because the producer had to have the equivalent of $184,500 in available funds during the hedge in order to meet the 47 margin calls.
The magnitude of margin calls depends on the amount of bushels hedged in the futures market. If the producer were hedging less (more) than 30,000 bushels in this example, there would have been less (more) than $184,500 in margin calls. Regardless, the main point is that it becomes more likely to receive margin calls in periods of high volatility. In some cases, like in Scenario 2 in our example (which is based on actual futures price in the last few months), these margin calls can be substantial. Therefore, it is essential to account for the possibility of margin calls when we hedge with futures contracts, especially in times of high volatility.
Take-away point #3: margin calls do not necessarily mean that you will receive less money at the end of the hedge
Although it is certainly painful to receive margin calls (even more so 47 of them as in our example), they do not necessarily mean that we will receive a lower price at the end of the hedge. Back to Scenario 2 in our example, in May 2021 we have a spot price offered by the local elevator in the producer’s cash market at $15.85/bu and the futures price at $16.45/bu. Since the producer initially sold in the futures market at $10.30/bu and now is buying at $16.45/bu to offset the futures contracts and lift the hedge, she is losing $6.15/bu in the futures market. Given that she hedged 30,000 bushels, a loss of $6.15/bu adds up to a total loss of $184,500 (=$6.15/bu x 30,000 bu).
As we have discussed before, $184,500 is exactly the total value of margin calls received during the hedge. Therefore, margin calls do not represent “additional” losses to the hedger. With or without margin calls, the producer is losing $184,500 in our example (or $6.15/bu on 30,000 bushels). The margin calls mean that this loss happens in “installments” during the hedge instead of being “charged” in full at the end of the hedge.
Furthermore, since the basis at delivery was -$0.60/bu as expected, the producer ended up receiving $9.70/bu as anticipated at the beginning of the hedge. Regardless the amount or value of margin calls, the final price received by the producer at the end of the hedge in this example is still $9.70/bu because the basis at delivery turned out to be – $0.60/bu as expected.
Take-away point #4: the question that often comes up…what if I lift the hedge while I am still holding my grain?
In a situation like Scenario 2 in our example, one could ask whether it would be “better” to offset the futures contracts and get out of the hedge before May 2021 in order to avoid more margin calls. After all, the market is going up and we do not need protection against lower prices. This is certainly a possibility, but there are at least two key points to consider before making this decision. First, if we lift the hedge, we will be carrying unhedged grain and we will no longer have any protection if the market happens to go down. In times of high volatility, prices can go down just as fast as they go up, so this is when hedging becomes particularly important. Second, as we discussed before, margin calls are often painful and inconvenient, but they do not imply a lower price at the end of the hedge. As long as the basis does not change, the frequency or magnitude of margin calls will not affect the final price that we expect to receive at the end of the hedge.
No one can tell for sure whether it is “better” to lift the hedge with futures contracts in this situation. Sometimes it may be, sometimes it may not. Either way, one should at least consider carefully the points discussed above before making this decision.
In this article, we discussed hedging with futures contracts in times of high volatility. In particular, we focused the discussion on some points related to margin calls. The general ideas about hedging and risk management apply to any type of marketing contract, but the discussion related to margin calls is specific to futures contracts. Given the high level of volatility that we have observed in commodity markets in the recent past, it is never too much to revisit the points discussed above and keep them in mind as we make marketing decisions involving futures contracts. There are a few other dimensions that could be explored within the points discussed above, as well as there are other points that could be discussed, but we will leave them for future articles.
Fabio Mattos, Assistant Professor Department of Agricultural Economics University of Nebraska-Lincoln firstname.lastname@example.org (402) 472-1796
A copy of this presentation which also includes an initial discussion of U.S. Ethanol and Distillers grains market prospects is found at the following web address on the KSU www.AgManager.info website:
The graphics in this presentation are targeted for both domestic U.S. and international grain market audiences, with prices represented in both domestic U.S. and international metric units. Acreages and supply-demand quantities rae also presented in both english and metric units in alternative graphics.
The session dealt in particular on the current U.S. and World market outlook of corn during a time of tight supplies and uncertainty about U.S. and World corn supply-demand and price trends for the remainder of calendar year 2021.