“The most unpleasant news is the growth of BDI. The cost of freight is forcing to lower the price on the part of the seller, but this process is limited by the profitability of production, so in the near future either the growth of freight will stop, or these costs will be transferred to buyers. In general, the season begins on the buyer’s side. It remains only to assume that the price bottom has already been found and the market is waiting for an adjustment, if not a reversal.”
Elena Faige Neroba
Head of Analytics at Marcopolo Commodities SA
In recent days, oil has faded into the background. And Trump’s tweets about the upcoming truce with China are no longer affecting the market so much. The world is discussing an eco-activist who could become the youngest Nobel Prize laureate, and negotiations between the presidents of the United States and Ukraine. As the date of the US presidential election approaches, the intensity of passions is growing.
Soon, the Northern Hemisphere will start harvesting soybeans, and the United States is trying to sell stocks, which in the last marketing year alone increased almost 2.5 times due to overproduction and reduced demand from the key buyer, China, and begins to trade in new crops. There are two reasons for this at once: the ASF epidemic and the tense situation between the largest world economies. Insignificant pressure on prices will create a forecast of a decrease in stock-to-use in the States by more than 10 percentage points compared to the previous season, but it is still greater, for example, in the 17/18 marketing year. At the same time, the average price of soybeans on the Chicago Stock Exchange decreased by 15% compared with 17/18 MY. This is due to the fact that, as a whole, over the three marketing years, this ratio decreased by only 1 percentage point due to the growth of production in Latin America first of all. And although the latest USDA data indicate a decrease in China’s expectations of soybean consumption, these figures are still underestimated, as ASF infection has not stopped, but, on the contrary, is spreading across the region. Despite the fact that China bought another batch of American soybeans, this factor is not a bullish signal for the market, because these volumes are not comparable with those familiar to the market. An attempt to find alternative sources of protein is also indicated by the agreement signed with Argentina for the supply of soybean meal. The license has already received 7 Argentine producers. The next round of negotiations will take place on October 10, but market no longer has any hopes for it. In addition, China bought another 3,400 MT of pork from the United States, which is absolutely not indicative of the level of consumption in the Middle Kingdom. For comparison, Mexico bought 13,400 MT per week, and South Korea - 4,600 MT. Brazil also received a correction of the weather and waited for the rains, which had a beneficial effect on the campaign. Brazil is a country that has received maximum benefits due to the trade war. The difference between Brazilian and American soybeans today is $ 20 / MT.
Not the best price situation in the corn market. Harvesting has already begun in the Northern Hemisphere. More than 6 MMT of corn was harvested in Ukraine, the yield is extremely low - about 6 MT / ha, and the average market expectations are far from last year’s 7.7 MT / ha. The data of local analysts agree on a crop forecast of 34-35 MMT, although the sown area is larger than last year. The strengthening of the Ukrainian currency makes corn from this country more expensive than its Latin and American competitors, whose currencies are now weak, and stocks and yields are quite high. Talking about the US crop “quite high”, we, of course, understand that it is significantly lower than the average for recent years due to the difficult sowing conditions. But the market has already taken these forecasts into account, and they are reflected in the summer price rally. Today, only a significant change in the figures of the balance of supply and demand can affect the market.
In terms of wheat, supply is still higher than demand. Production has increased: for example, Ukraine and Argentina are showing records, and even Australia is trying to restore past volumes. True, the drought in Australia has dragged on, and this may moderate expectations in terms of production. Argentina, where quite arid weather has also been observed lately, still has time to recover and local analysts do not lower their expectations for a 21 MMT crop. The latest news about increasing the forecast for wheat production in Russia from the Agrarian Ministry to 78 MMT seems a little exaggerated. It is possible that we will return to the 75-76 MMT range again. Local analytical agencies confirm this idea: IKAR - 75MMT, SovEkon 74.9 MMT. Egypt, one of the key consumers of wheat, is making careful purchases. To date, almost 30% less wheat has been bought at tenders than on the same date last year. At the same time, the share of Russia has so far decreased, but Romania and Ukraine have already sold more than during the same period of the last marketing season. This is due to high bid prices from Russia, where manufacturers expected a premium for protein. But recent tenders, Russia is trying to win its monopoly in this market. Although the presence of France in the procurement structure, which was absent for quite a while on the Egyptian market, suggests that overproduction is also taking place in Europe. Syria abandoned the attempt to exchange 100 kMT of durum for Russian wheat. In addition, Russia plans to ship 600 kMT to Venezuela, as well as to continue the expansion of the Brazilian market. At this time, Brazil will purchase out of the quota of 750 kMT of American wheat by the end of 2019. It is important to note that Ukraine has already sold 48% of the export potential of this season.
Even French barley today is cheaper than Ukrainian by 3-4 USD / MT, due to which the pace of its exports exceeds last year. Although production in Europe decreased by 5 MMT, but in Ukraine, on the contrary, increased.
The most unpleasant news is the growth of BDI. The cost of freight is forcing to lower the price on the part of the seller, but this process is limited by the profitability of production, so in the near future either the growth of freight will stop, or these costs will be transferred to buyers.
In general, the season begins on the buyer’s side. It remains only to assume that the price bottom has already been found and the market is waiting for an adjustment, if not a reversal.