Scoular Co.’s senior vice president of commodity risk management Ed Prosser offers his insights into the spikes in 2021 grain costs.
After the January World Agricultural Supply and Demand Estimates (WASDE) and the U.S. Department of Agriculture (USDA) Grain Stocks reports dropped on the same day, grain prices went skyrocketing. While many anticipated some adjustments, a significant decrease to corn stocks sent prices soaring and, with an already limited supply, soybeans followed suit.
To analyze these market movements and to provide an outlook for the second half of the year, Ed Prosser, Scoular Co.‘s senior vice president of commodity risk management, joined the Chat to discuss the January reports, the influence South America’s harvest may have in U.S. grain markets and to offer feed producers some advice.
Video transcript: Feed Strategy Chat with Ed Prosser, senior vice president of commodity risk management, Scoular Company
Jackie Roembke, editor, Feed Strategy: Hi, everyone. Welcome to Feed Strategy Chat. I’m your host, Jackie Roembke, editor of Feed Strategy.
This edition of Feed Strategy Chat is brought to you by WATT Global Media and FeedStrategy.com. FeedStrategy.com is your source for the latest news and leading-edge analysis of the global animal feed industry. Today, we’re joined on Zoom by Ed Prosser, senior vice president of commodity risk management at the Scoular Co. Hi Ed, how are you?
Ed Prosser, senior vice president of commodity risk management, Scoular Co.: Good, Jackie. Thank you. Thanks for having me.
Roembke: So there was a lot of activity in the grain market this week. I was wondering if you could, you know, give us a little insight into what’s been driving grain price volatility so far in 2021?
Prosser: Well, the January crop report is characterized as the “mother of all grain” reports, it’s the one time where we see stock and WASDE all at the same time. So the Tuesday report was a big data dump. It always has a few surprises in it — and I think this one probably didn’t disappoint. It was a little interesting, though, because I think that maybe we are trading the numbers that we don’t believe, not necessarily the numbers that we got.
We knew that soybeans were tight. We sold a lot of soybeans to China. And certainly the government confirmed that. But I think the market thought that soybeans were tighter than what the government said — I think the average guess on soybean carry out was 130. Government comes down to 140. Actually, right after the report, that was viewed as a little bit bearish, there was some selling, you know, for a couple seconds after the report basis on that number. And then on the wheat side, we found a million acres of hard red winter (HRW) wheat. I don’t know that the market was really thinking about that wasn’t particularly friendly. But then when we come to the corn balance sheet, that’s where things get very interesting very quickly.
Corn stocks were down 350 million bushels; the government said we didn’t grow as much corn as we thought we did last year. I think they dropped production to down 321 million bushels, they dropped the corn yield down to 172. But, you know, optically, it wasn’t that big of a deal, because you looked at the corn balance sheet and it said we’re gonna have 1.5 billion bushels of grain when we’re done. But I think that people started doing the math, and they couldn’t quite figure out how the government got there. So what the government did was said, “We didn’t have as much corn, but we’re gonna have more corn leftover because we’re gonna quit using corn.” They dropped corn grind for ethanol. They dropped exports on corn. They dropped feed on corn. And as your listeners know, the year is half over on our crop year. So we’ve only got six months left, and people started doing the math. And it’s like, I don’t know that we can get corn usage down as far as the government says they were going to.
So the numbers at first blush weren’t terribly friendly, but I think that maybe the market decided that I don’t know that we can do that.
I think to get to the government numbers, you would have to restrict corn usage for the for the second half of the year, like 12% year over year. And there’s no indication we’ve been doing that. Certainly the first six months don’t show any indication that that’s the case. And I think the market started to started to put its own thoughts around the production number that it just got from the government and that’s when corn started to appreciate.
The other two then, in my mind, soybeans has to pay attention to corn. 140 carryout on soybeans is very tight. We need new acres of soybeans. We need to grow a big soybean crop next year in North America to build our stocks back up. As corn goes up, you know, farmers are deciding their planting intentions here this winter. They’re less likely to plant soybeans if corn is expensive. So I think soybeans needs to go up and I think that’s why soybeans kind of went in sympathy.
And usually wheat and corn are okay divorcing themselves of each other, but not this time and I think it’s because that those spreads are unusually narrow. Typically, wheat prices are way more than corn, and they don’t really pay attention to each other, but today that’s not really the case. In Dodge City, Kansas, a pound of wheat and a pound of corn are about the same price. I think the wheat markets are a little bit worried that it’s going to work into the feed rations — particularly in the Southern Plains. And I don’t know that it’s ready to do that yet until it understands how much wheat we’re going to grow here for our summer harvest. You know, the Southern and Central Plains have been dry, conditions aren’t really good.
In my in my mind, the beans and wheat kind of went in sympathy and corn’s driving the bus.
But it was kind of a shocker. You know, if you remember in August, we thought that the corn yield was 180, 178. And here we are finally at 172. So, between the Chinese demand that we’ve seen the last half of the year, and nick here and there from the weather on yield, we’ve gone from having a big pile of these commodities kind of everywhere to it being legitimately tight.
Roembke: What’s the like situation in South America?
Prosser: Well, this is the time so it’s their summer, obviously. So weather really starts to matter. I guess I would say that between the third week of December and today, the weather’s better. We were really concerned right before Christmas, about the dryness in southern Brazil, in Northern Argentina. It’s moderated some, in fact, we had a front that went through Brazil right after the report. So it’s getting a little bit better. The government, interestingly enough, didn’t change South American production near as much as maybe the market thought it should have. I think it called the Brazilian bean crop still 133 million ton. You know, there certainly are weather guys that want it to be 125.
There’s a story still to be made in South America — good or bad, quite frankly — you think about it being the equivalent of June 1 in the U.S. there, they’ve got a lot of weather that can do a lot of damage and they’ve also got weather that could be very beneficial. So that’s probably the focus that these markets will take over the course of the next six weeks is very much on, not only the South American weather, but the South American weather forecast.
Roembke: And the big question: What’s your advice to feed producers? Anything they can be doing to keep their costs down?
Prosser: Boy, if you haven’t done anything yet, the horse is kind of out of the barn. I think being judicious about your risk management plans, making sure you watch the price of your inputs versus the escalating price of feed, being proactive about trying to find suitable replacements in your ration to manage your costs; but quite frankly, until North America confirms good crop, which will not really be until July or August. I think it’s going to be terribly difficult to to moderate these feed costs much.
I do think that the market probably has two-sided risk, you know, when you start you were pretty rare, you know, somewhere around $5.50 on corn and $14 something on soybeans. So I do think, you know, these are pretty unique prices. And I do hope that the North American farmer finds new acres to plant these higher-priced crops on.
We had 7 million acres of prevent plant last year. I think that’ll all come back, God willing, and the weather cooperates a little bit. And typically when we have these kind of revenues at the farm gate level, we encourage farmers to plant more acres. So that could be helpful, but those are medium- and longer-term solutions. Unfortunately, I can’t tell you that there’s a lot of really attractive solutions in the short term.
Roembke: Excellent. Well, thank you so much for your insights, Ed.
Prosser: Thanks for having me.
Roembke: Great. And thanks to you for tuning in. Until next time.