Article 30 May 2019
Rainy and wet conditions have slowed grain plantings in the US and the historically late crop is having implications for global prices and volatility.
This is centred in the wheat and corn markets but is having knock-on effects to other markets, especially soybeans. This move in the grain markets will have implications for many industries including livestock and biofuels in the coming season. While an increase in uncertainty and volatility are probable where the market moves from here is not easy to foresee given the multitude of factors impacting values today.
Figure 1; CBOT Grain Prices, Front Month Continuation
Grains prices on the US futures exchanges have rallied in the past week (figure 1) as progress reports from the USDA show inclement weather delaying planting. The recent USDA report on the share of the expected acres planted showed only 58% of the US corn crop had been planted by May 26, down from 90% last year (and a 90% five year average, figure 2).
Figure 2; Weekly Corn Planting Progress, USDA
The rally in prices will help incentivize planting late instead of claiming prevent plant insurance, but values may still need to increase further (a good review here), and even with high prices the number of prevent plant acres could be historically high. This relationship between planting late or claiming insurance is a function of gross margins and is clouded by the recent support the government has pledged for farmers (will the insurance plus support pay out mean more acres go unplanted?). The implications are that the wet conditions will results in higher prevent plant acres and a lower yield, both of which mean less corn and wheat than anticipated only a few weeks ago. This uncertainty on yield and planted area may reduce confidence in the USDA’s production figure, and it may not be until late in the season the market has solidified on a supply expectation.
Table 1; Volatilities During Planting Delay Seasons (CBOT Corn)
Figure 3: The Most Delayed Planting Seasons (Since 1980), USDA
If we compare this season with previously delayed crops (figure 3) it is clear that 2019 is rather unprecedented. There is one characteristic all previous seasons with a planting delay share, and that is a major increase in volatility (table 1).
As the seasons all have differing expectations and external factors there are few other characteristics they share, price moves actually differ significantly (one season saw a rally, one no move and 3 seasons actually had prices fall three months after the delay). While yields are likely to fall in a delayed season other factors such as demand, and market expectations sway prices. This means that while prices are up now due to the unexpected delay they could certainly fall in the coming months if the price rise reduces demand or other factors weigh on values (such as trade wars).
Figure 4; Corn Prices EU/Brazil
Stable uses a number of corn indexes for our products, including Brazilian corn from Cepea and EU reported feed corn (figure 4). The grain markets globally are highly correlated, though major basis risk can exist due to geographical implications and foreign exchange shifts. International indexes will increase in the coming month inline with the changes in the futures market, following that move the next trend is difficult to anticipate.
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