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Uncertainties remain in grain markets

Shelley E. Huguley swfp-shelley-huguley-corn-clouds.jpg
Economist Mark Welch expects some adjustments in the supply and demand balance sheet that will weigh on the potential for prices to go higher.

Despite a strong run of grain prices since Russia’s invasion of Ukraine, uncertainty remains in the market.

Weather concerns in key U.S. production regions, high production costs (especially fertilizer), global crop forecasts, and the impact of higher prices on demand all play roles in commodity market movements.

Texas A&M AgriLife Extension Economist and Marketing Specialist Mark Welch says the dilemma now is to consider all these (and other) factors and “determine where we are and what markets might look like weeks and months ahead.

“In the last week or so, grain markets have digested and accounted for a lot of the Russian invasion impact,” Welch says. “So, where do we go from here?

Crop conditions

“If we look at the wheat market, we see a good bit of the Southern High Plains in bad shape; Oklahoma is dry; it’s dry in western Kansas. We question what hard red winter wheat will make. Soft red may be better and spring wheat conditions are more promising.”

He says globally, India has a good crop and will be able to export. It’s uncertain if Ukraine will harvest wheat. “Russia is trying to export and still moving wheat.”

See, South Texas crops: Swayed by drought, not tillage practices 

Welch says the corn market will likely see continued effects from Ukraine being limited in the spring crops it can plant. Other factors include the U.S. crop planting at a normal pace. “The South American crop is in pretty good shape.” He says livestock feed use is a demand-driven market. “The question is if it will back off a bit and readjust to higher prices. What will the livestock inventory be moving forward?”

Welch says market observers should “assess the fundamental forces in the market — in addition to factors in Ukraine. We have near-record high price levels in corn. Do we go up from here or do we sit back and let things play out?”

Less corn acreage

Also, despite corn prices at a near all-time high, the latest USDA planting intentions survey indicated 2022 corn will be down by almost 4 million acres. “The record high price and availability of fertilizer is a big factor,” Welch says. “Are farmers willing to pay that?”

Many are not and are switching acreage to soybeans to eliminate that piece of input cost. “Soybeans are not as dependent on nitrogen fertilizer,” Welch says.”

He also takes the latest USDA planting intentions survey with a bit of caution.

“That was March. Since then, corn has gone up relative to the price of soybeans. Will that bump influence late planting decisions back to corn? We just don’t know.”

Historically, Welch explains, the numbers reported in June do not match what were reported in the March survey.

“Most years, in fact, corn acres go up not down. I expect some degree of increase in corn acres.”

He says spring planting weather will play a role, along with higher prices and high input expenses.

He cautions producers and marketers to “take a breath before deciding where to jump.”

He says it’s still too early to know what decisions farmers will make in the field. “We just don’t know. We still could see more corn acres if famers have the flexibility to switch back.”

Demand factors

The overall global economy will play a role, too, Welch says. An International Monetary Fund report this week (April 18-24) indicates high energy prices and the Ukraine conflict trimmed economic growth expectations for 2022 and beyond. “That affects agriculture a lot. It affects consumers’ ability to buy what we produce.”

He adds that even with tight supplies, high prices affect customers’ ability to pay. “When economies are growing and robust, the demand for feed, food, and fuel in emerging economies grows with an expanding middle class. That growth is tamped down or tempered with higher prices.”

Look for adjustments

Welch expects some adjustments in the supply and demand balance sheet that will weigh on the potential for prices to go higher. “Over time, with high prices, agriculture will increase production, given adequate resources and favorable weather.”

Welch says farmers’ annual quandary of managing costs and returns is multiplied several fold by near historic high input costs this spring.

See, Drought grounds South Texas crop dusters

“Will producers push for yield this year with these high input costs? Or will they dial back inputs where they can?  Our budgets and analyses show profit margins are still there, but huge cash outlays mean producers can’t take lightly the huge financial risk they face this year.”

He adds that deciding whether to push yield as they would in normal circumstances will be a big issue for farmers this growing season. “It will take time to get a handle on it. We will not know if their decisions pay or not until combines roll.”

Cutting costs

Welch says if producers have residual fertilizer in the soil, they might dial back a bit for one year. “Beyond that, they will need to make up the deficit. Two years without fertilization looks a lot different.

“It depends on the farmer,” he adds. “In dryland, some will choose not to add fertilizer. In dryland cotton or wheat, it’s understandable, as dry as it is now. If we get a rain and conditions look more positive, some could change plans with later planted crops. We can hit cotton with fertility a bit later. For corn, mid-June is about the limit.”

Big picture

Welch says producers should be looking at the big picture as they make market decisions. “Markets were down a bit yesterday and today (April 21). That makes sense with the run we’ve had and prices pushing as far and fast as they have. We account for all we can account for. Now, what do the fundamentals look like?”

The upshot of all the movements, uncertainties, and reports, Welch says, is that individual farmers must look at their investments.

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