Market Analysis: Arlan Suderman

A possible end to the violence in Ukraine coupled with weather concerns dominated the trade. For the week, the nearby wheat contract fell 43 cents, while May corn shed 21 cents. U.S. export sales of soybeans slowed this week as entering the final day of trade, no export sales had been announced. The soybean contract dropped 8 cents. May meal declined a dime per ton. May cotton expanded $5.72 per hundredweight. Over in the dairy parlor, April Class III milk futures gained 60 cents. The livestock sector was mixed. April cattle added $3.20. April feeders improved $4.35. And the April lean hog contract moved $3.33 lower. In the currency markets, the U.S. Dollar index subtracted 88 ticks. May crude oil decreased $3.12. COMEX Gold lost $64.20 per ounce. And the Goldman Sachs Commodity Index dropped almost 12 points to finish at 721 even.

Yeager: Joining us now to provide insight is Arlen Suderman. Hey, Arlan!

Suderman: Hey, Paul, it's good to be back with you.

Yeager: Good to have you here. And weather is always fun this time of year. We were talking about the weather before we started rolling and that is a story for where you are at, it has still been dry in the Wheat Belt. Has the weather taken over the Ukraine Russia story as the biggest factor in the wheat contracts in the United States right now?

Suderman: Well, that would certainly be tempting to think so because we were lower on Friday and saw a selloff there and we were having rains into the Central Plains. I personally don't think the weather is really a big factor. Many of our traditional traders who trade the fundamentals of the market are really on the sideline right now because they're so frustrated by the volatility. In fact, if you look at Kansas City hard red winter wheat open interest, which is the number of open contracts being traded in the market, it was at the lowest level since June 2015 as we closed out the week. So we appreciate the rains and the moisture and the snow that we're getting this weekend. There's going to be more early next week. But we're going to need a lot more in the month of April to really break this drought and that has implications then for the Midwest whether we're able to break this. People in the Midwest really should want this Plains drought to break because that can really influence the weather pattern that sets up for the summer.

Yeager: Well, and weather is always the topic and we can kind of move into that as we proceed. But let's look at Ukraine for just a moment. The story keeps coming out of the challenges of harvesting that winter crop. Will their farmers be able to get out there? That impacts the global market. If I'm a producer in the Wheat Belt in this country, what do I need to see for any signs or indication of what I should do for what is happening there in Ukraine?

Suderman: Well, from a Ukraine standpoint 90% to 95% of their wheat production is winter wheat so it's in the ground, looking pretty decent when this battle started and it needed to be top dressed in the spring, as most of our winter wheat needs to be and about 50% of the fertilizer was in position before this conflict started. Some fields in the western half of the country did get top dressed and they'll benefit from that. So most of the rest did not so they're going to have substandard yields. Then the question is, will they get harvested? And the answer to that question is the same as will the summer crops get planted? Most of the farmers headed to the war effort, sent their wives and children off to neighboring countries and they headed to the war and we've seen most of the fuel go to the war effort as well, we've seen reports of Russian troops targeting farm equipment to destroy it or to damage it. So when they come back, when this ends, if it ends this next week what is the situation going to be? How much of the equipment is going to be damaged? How many farmers have been injured in the conflict? Will they have fuel for harvesting? Those are things we don't really have an answer on, we're not real optimistic and I'm saying this from the standpoint that we have customers in Ukraine and so we're talking to those customers and right now we're not real optimistic that there's going to be a lot of exports coming out. The infrastructure has some significant problems in Ukraine. Russian troops have damaged the ports. They will be harvesting some wheat, they will be planting some summer crops, but we think exports are going to be minimal out of Ukraine this next year.

Yeager: Well, and the same story is in corn. When you talk about the farmers their seasons kind of match up with what we have in the "I" states. The infrastructure story is going to be the same whether it is wheat or corn. What is the Ukraine impact on the U.S. corn sales as we still look at this chart that just has an incredible range on it?

Suderman: Take us back to the first of February before the Russian invasion of Ukraine. If I would have told you we're going to have a drought in Ukraine that cuts its production by 60% or 70% that would be market moving news. Essentially that is what we're looking at. We don't know exactly but if we linger this war until about the 15th of April I think the odds of any corn getting planted of significance are near zero at that point. And so it's getting down to the critical time in order to see corn field work done and corn planted. So that takes a lot of corn off the market, maybe as much as 30, 35 million metric tons of corn taken off the world market at a time when world supplies are tight. If you look at world supplies minus China and minus the United States looking at the rest of the world we're about a 36, 38 day supply, the tightest in 20 years. We just don’t have that margin for error going into this. So that means we stay tight for the next 12 to 18 months going forward.

Yeager: Which ties us back into the opening comments about the weather. Right now on the screen we're showing a planter, we're about to start rolling the planters, we've already seen it in Texas, it's just moving up the way. American producers who have some old crop or have maybe not priced some of their new crop, some of them get a little hesitant, what should they be looking at to help make their decisions?

Suderman: Yeah, I sense that hesitancy when I talk to farmers and when I was visiting with them at Commodity Classic. It really comes down individually to the producer obviously. If you're a farmer who is nearing retirement age and you have a nice nest egg and you don't have any debt you can afford to take a few more risks in how much you hang on. If you're a young farmer with a lot of debt then you've really got to focus on the margins and if you can lock in good margins relative to minus what you're paying for your fertilizer or your inputs, then it does make some sense to be scaling in on these rallies. But overall the fundamentals look like they're going to be tight enough unless we have a much bigger safrinha crop in Brazil than what we're currently anticipating that this market should remain elevated, particularly with inflation remaining a problem. There will be ups and downs, there will be lots of volatilities and selloffs. But we anticipate that the breaks are going to be sold. Now, the one caveat that could, that we need to watch or black swan event if you will, would be if we would see China make a move on Taiwan to reunify it at some point. They're probably not going to give us advanced warning on that. That would have the opposite effect on the commodities. We would expect a selloff in the commodities if that happened. That's why you don't want to just wait and say I'm going to wait this thing out and see how high. Kind of spread out your risk in your marketing.

Yeager: All right, so let's get into -- we had heavy stuff there in those two. Beans quickly, a lot of the same factors are in place. What are we looking at here this week?

Suderman: If we look at beans, we calculate that the South American drought has already claimed about 35 million metric tons of production. That is 1.3 billion bushels roughly. The USDA really hasn't fully accounted for that on the world balance sheet yet. They've just kind of massaged some numbers, reduced exports, reduced imports but really haven't accounted for where is that demand going to happen? We think it's going to end up drawing down old crop stocks below 200 million bushels, so nearly another 100 million bushel drop yet as exports climb in July and August. We think it's going to increase exports for the new marketing year because Brazil won't have the supplies then to market at that time. So it's going to keep demand on U.S. soybeans strong. New crop sales to China and to all customers, but most of it is China, are record levels right now for the new crop. So the bottom line, as long as we don't have a black swan event like China making a move on Taiwan, this market should be well supported with the breaks being bought with more risk going forward if we have weather risk in the United States this summer.

Yeager: All right, let's flip to the meats and proteins. Cattle again the story continues to be who can process but the demand is there, you're starting to see stories of people maybe trying to hold off on some demand. What is that doing to the cattle market right now/

Suderman: Very interesting dynamics. We're finally getting slaughter pace up to 125,000 head per day on some days and sometimes even back-to-back days. We haven’t seen that since before the pandemic. That is a positive. We're seeing pretty good domestic and global demand for beef as well, including last week's export sales report having a large sale to China, they have quietly become one of our top three importers of U.S. beef right now. And that market looks solid going forward. But our weights are near record high for this time of year. That means we're getting a lot of meat per animal going through. So we're in this fine balancing act. The packer margins are still pretty good, they have incentive to pull animals through. Last week's cash trade was a little disappointing though. And so this is a fine balancing act. I anticipate we're going to be consolidating in here. Barbeque season starts up shortly, that should help.

Yeager: Yeah, hog wise what do you see there?

Suderman: Hog wise, the number of hogs available continues to fall below what USDA has anticipated. That has happened for the last four quarterly hogs and pigs reports in a row, our actual numbers have come in less. That has been a positive. Negative has been that China has been shutting down on buying U.S. pork as they have been oversupplied. That has been a negative. Mexico has been picking it up but we're still short on the exports. Overall from this protein complex, the reason we saw the big selloff was with high energy prices and inflation suddenly the funds became nervous that the consumer was going to quit spending money on the higher cuts of meat and that continues to hang over this market. So far the consumer has the money because of all the stimulus in the system and we haven't seen that big drop off but that's the risk.

Yeager: Okay, Arlan, we'll continue that discussion in a moment. Thank you, sir.

Yeager: That will do it for this installment of Market to Market. We will talk more with Arlan in Market Plus so join us there. You can find it free on our website of MarketToMarket.org. And I want to say thank you for helping us clear another milestone on our YouTube channel this week. Join the party by subscribing at YouTube.com/MarketToMarket. Ring that bell for notifications to know when that we will drop new content. Next week we take a look at a land lease program in Colorado that is benefiting schools. Thank you for watching. Have a great week.

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