The Pressure is on North America to Meet World’s Hunger for Grain

Key Takeaways:

• Production issues in the world’s largest exporting regions are exacerbating an already tight supply situation.
• North America is the last hope for the global grain trade in 2022.
• Producers should be prepared for additional volatility and look to control risk when they have the opportunity.

As North American farmers work to get the 2022 crop in the ground, it’s become increasingly apparent that this year’s crop is more crucial for the world’s food supply than in most years, according to a panel of ADM analysts.

Typically, importing countries can rely on grain from South America, Europe and North America. This year, however, the southern hemisphere crop fell significantly short of earlier estimates because of dry growing conditions.

In Europe, the situation in Ukraine shows few signs of resolution, and there’s already been significant damage done to the infrastructure used to move grain to other parts of the world. If the conflict ends tomorrow, estimates show it will take at least six months to get the country’s agricultural infrastructure fully operational again. Ukraine is typically the world’s fourth largest corn exporter, and it is the largest sunflower oil exporter. It also serves as a conduit for grain exports from other countries in the Black Sea region.

The tight supply issue is being further exacerbated by other nations restricting exports of grains and oilseeds to protect their domestic markets. For example, Indonesia recently banned the export of palm oil and India is forbidding the export of wheat.

Near-term market prospects

As a result, market volatility is likely to remain high until we have a better idea of crop prospects in North America, which analysts will be able to estimate more accurately in late June. In the meantime, each crop progress and condition report in the U.S. will be watched closely by nervous traders.

As the season progresses, demand will be the key driver. It looks incredibly strong for the rest of the year into middle of the first quarter of 2023, the analysts say. They point out that South America will soon empty out their soybean stocks, leaving buyers to turn to the U.S. to fill their needs until the new crop is available this fall.

China will be another big driver of demand, but how much will be determined by its economy and the impact of pandemic shutdowns. Backlogs at Chinese ports have been building again during this most recent shutdown.

What to do now

The ADM analysts offered up several ideas on managing risk in this volatile environment.

• Take small hits rather than aiming for the fences. If you keep waiting for that one big score, you can get to a point where events outside your control can derail your goals . It’s emotionally taxing. You want to feel like you’re in control and gaining on small hits when you get them helps you stay on course.
• Understand your risk tolerance. One way to do this is to lay out both outcomes. If you decide to take off some risk by selling grain and the market goes higher, how does that make you feel? Conversely, how does it feel if you keep the risk on and the market goes lower? The worst feeling is having a lot of risk on and not being sure what to do with it.
• Develop a plan and then follow it. Look for opportunities to hedge some of your risk with different buying opportunities for fertilizer and fuel, and by forward contracting grain. For example, if you sell grain, go ahead and lock in margin by buying your fertilizer and other inputs.
• Keep tabs on world events and make decisions later in the year. These analysts do not recommend locking in current fertilizer or fuel prices as a speculative position. As we move forward, we’ll get a better idea on what 2023 may hold. Significant events that will happen include China fertilizer policy and food policy, India subsidies, Brazilian yields, U.S. yields, and things we don’t know yet or see today. Basically, if you sell your grain, buy your fertilizer. If not, take cues from world events moving forward.