The creation of the Black Sea export corridor in summer 2022 was the catalyst for the bearish resetting of wheat values. War risk was added immediately to the marketplace in spring 2022, but lingering in the background was a Russian wheat crop of 92 million tons – with some suggesting actual production was as high as 100 – 102 million tons. This was followed by a Russian wheat crop of 92 million tons in 2023, and it was clear the Russian market was oversupplied.

Sanctions and high insurance costs compounded the issue. Therefore, despite the first land war in Europe in seven decades, wheat in Ukraine and Russia was priced to sell. Russian exporters since summer 2022 have been rather aggressive in clearing inventories and in each week since July 2022 Russian wheat has been the low cost origin.

But for the first time in two seasons, weather in Russia is far from ideal. Large portions of critical winter wheat producing regions in eastern Ukraine and southern Russia have experienced only 10% – 30% of normal precipitation. This pattern is unlikely to change until early May at soonest. It’s the weather in May and early June that determines Russian wheat productivity, but the pattern to date so far has been much different than in late winter and early spring in recent years. World importers, particularly in the Middle East and North Africa, now rely heavily upon cheap and available Russian supplies. Crop loss in Russia strips the market of this bearish sentiment from summer onward. Russian rainfall and temperatures in May are critical. Additionally, the European Commission projects European soft wheat production to decline 5 million tons in 2024 due to lost planted area. This makes Russian weather and wheat output even more important. Whether Russian wheat production in 2024 is 85 million tons or 93 million tons is a big deal.

Brazil in 2023 was the world’s largest exporter. In years of normal weather, Argentina and Brazil combine for 40 percent of global trade. This compares to just 30% in 2010 and has made the U.S.’s footprint smaller in the world market. Given prices are generally determined on the margin –  which in the case of agricultural commodities is the export market – South American weather, yields and production are more important than weather and yields in the U.S. 

Normally, the USDA and South American agencies (such as CONAB, Brazil’s USDA equivalent, and the major grain exchanges in Argentina) are aligned in their respective South American production estimates during the spring months. This is very much not the case this year. In fact, production estimate discrepancies have only gotten wider, and whether the world’s corn surplus expands or contracts in 2024 is unknown today. 

USDA projects Brazilian corn production at 124 million tons. CONAB in Brazil estimates Brazilian corn production at 111 million tons. USDA projects corn production in Argentina at 55 million tons. The Buenos Aires Grain Exchange estimate Argentine corn production at 49.5 million tons. This combined 18.5 million ton spread is the difference between an adequately supplied global corn market and one that’s rather tight. USDA numbers imply major exporter corn stocks as percent of consumption – the primary driver of price – at a large 10.8%. South American agency numbers imply major exporter corn stocks at a very tight 7.7%.

Northern Hemisphere producing countries largely avoided major weather issues as La Niña transitioned to El Niño. On balance, El Niño’s presence during the Northern Hemisphere’s summer months is a positive to rainfall patterns and grain yields. Grain yields were very close to longer term mathematical trends in the U.S., Europe and Black Sea Region. This kept fear of supply issues absent from the market. 

However, the return of La Niña is imminent. La Niña, on balance, challenges rainfall patterns and yields across the southern United States, while allows for excessive heat in wide portions of the U.S. agricultural belt. But more than using normal La Niña-based correlations, it’s the speed at which La Niña arrives that leaves forward supply outlooks less reliable. The coming transition from El Niño, which is present today, to La Niña, which will be present by June or July, will be much speedier than normal. Long term climate forecasts will be less reliable, and it’s difficult to point to analog growing seasons for even decent guesses on Northern Hemisphere summer weather patterns.

What is known is that La Niña is very bad for Argentina and southern Brazil. The 2023/24 South American growing season has just ended, but based on longer term ocean temperature forecasts, La Niña is probable to be present during December and January, which is strongly correlated to drought in Argentina. It’s not often that weather-based correlations are this strong. To that end, global total crop yield has struggled to grow in each of the last eight years. Our bet is that challenges – or the perception of challenges – continue in 2024. Large crops are still needed in 2024 to build global grain stocks.

Much of the speculative community’s position in the agriculture space has, rightly, been focused on the arrival of lofty lending rates and incredible strength in the U.S. dollar. Strength in the U.S. dollar correlates with bearish trends in major grain markets, and the recent cycle of interest rate hikes has kept discretionary participation in the ag space limited. 

This is also a measure of purchasing power elsewhere in the world. A strong U.S. dollar implies currency weakness in other countries. The Egyptian pound and Turkish lira sit at all-time lows. Currency weakness in places like Nigeria and China have, on the margin, slowed imports there. Countries will import to maintain food supplies, but growth in trade will struggle amid the U.S. dollar strengthening – which we expect to remain the world’s currency for trade for some time yet. 

The question in 2024 centers on whether US dollar strength continues. We doubt lending rates are cut in the first half of 2024 but observe that a cycle of reduced lending rates shifts the focus to massive U.S. national debt, which in 2024 is estimated to reach $34.6 trillion. Excessive U.S. debt negatively impacts the value of a currency normally. Pay close attention to the U.S. Federal Reserve policy.

Mexico will increase its imports of corn in crop year 23/24 by 1.7 million tons, or 9%, year-over-year. U.S. corn export commitments to Mexico as of early April totaled 18.7 million tons, up 4.8 million tons, or 35%, year-over-year. USDA’s forecast for annual Mexican corn imports is still likely 500,000 tons too low. The catalyst for enlarged corn imports is consecutive years of drought. Drought is still in place across key areas of Mexico’s winter corn production belt, and so output growth is unlikely in 2024. Record Mexican corn imports will do little to loosen supply and demand there.

Even assuming record corn imports of 21.1 million tons, Mexico’s corn ending stocks on September 30, 2024 will total only 2.2 million tons – which covers only 18 days of consumption. Assuming flat Chinese demand places Mexico as the world’s top importer, AgResource expects Mexican corn imports to increase another 2 – 3 million tons in crop year 24/25. Mexico must increase its corn imports on annual basis throughout the next 2 – 3 years to increase inventories. The U.S. will be the top supplier to Mexico, but Mexico’s need for larger imports will contribute total global corn trade growth, which on the margin raises the burden on yield performance in the U.S., Brazil and Argentina.

Overall, grain market uncertainty in 2024 is mostly a function of weather. We expect the market to readjust its assessment of risk on a weekly basis beginning in June.

AgResource has no brokerage affiliations, nor manages money for itself or others.

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