“I do expect the volatility to continue, not only from a fundamental perspective but also from a monetary and fiscal policy perspective as well. Various FED’s have increased money supply to combat the pandemic, but now as we get into 2022 they have started to communicate reducing their stimulus efforts…I think the largest factor over the coming months will be what spring weather and fresh speculative money flows.”
Commodity Risk Manager
Vice President Eastern
Europe/Black Sea Region
2021 has been a very volatile year for the grain markets. In many regions, extreme weather events such as heavy rains, drought and frost have adversely affected the crop. The increase in the cost of energy, the growth in the demand for biofuels, the record levels in fertilizer prices caused the prices to reach record highs. Panic purchases and the tendency to keep stocks increased by rising prices also boosted the prices. This has increased the pressure on supply chains. Freight rates for major exporters have increased by more than 40 percent due to supply chain bottlenecks and tight supplies of cargo ships. Some countries have implemented trade policies intended to mitigate the effects of rising food prices. These restrictive policies further increased the volatility in the grain markets.
So, what awaits us in 2022? Will the volatility in the markets continue? Will the markets enter more stable waters? Will prices return to pre-pandemic levels? What will be the key factors affecting the wheat prices in the coming months?
We asked these questions to Matt Ammermann, commodity risk manager at StoneX. Working at the forefront of risk management in one of the fastest and largest growing agricultural markets in the world, he provides risk management solutions to help improve and control margins and the impact of commodity prices to a business’s operation. For the past decade, Mr. Ammermann has been working in the region with producers, traders, exporters, crushers, millers, and consumers from all commodity groups helping to guide them on how to effectively manage their price risk.
Here are Mr. Ammermann’s answers to Miller Magazine:
2021 has been unprecedented and volatile for grain markets. High prices, extreme weather conditions, logistical bottlenecks…Grain prices have reached record highs. What are the key factors that have driven the market in 2021?
Yes, you are right- many factors to consider for 2021, but I think the main driver for it all has remained the continued actions out of response to the seemingly never-ending pandemic. Federal reserves around the world continued to stimulate economies, and this kept fresh money supplies prevalent and allowed the speculator to trade like never before. Fundamentally there remains stories present, with wheat originally was active demand to help build up reserves as lockdowns created the need for additional demand. On the export side, restrictive actions in Russia remained to help tame export flows in order to protect the domestic market. Wheat finished the year +20% on the year, corn also had a good year at +20% YTD as supply constraints were largely fed the Brazil safrinha shortfall. U.S. corn and soy yields were highly debated once again. During the peak summer months, fear was there, but at the end of the day crop genetics still impressed in the U.S. and created near-record yields on far from perfect conditions.
Do you think the grain market will continue to be volatile next year? What do you expect from 2022?
Yes, I do expect the volatility to continue, not only from a fundamental perspective but also from a monetary and fiscal policy perspective as well. As described above, various FED’s have increased money supply to combat the pandemic, but now as we get into 2022 they have started to communicate reducing their stimulus efforts. This plan in my opinion remains part 2 of 2, thus another chapter the markets must navigate. Fundamentally the largest factor remains South America weather and how the La-Nina plays out yet for the balance of the growing season in S.A. After this, the trade must then consider the seasonal norms per Northern Hemisphere growing season. Spring of 2022 should be interesting to consider to see how the fertilizer markets impact 2022 corn plantings, specifically in U.S. and Ukraine, as well as wheat yields and quality amid the lack of proper applications on winter grains this fall. Weather always plays an important role, and it seems more recently over the past few years we are just one weather event away from a catastrophe.
IS THE MAX COVID-19 PAIN BEHIND US?
Global grain production is poised to hit an all-time high but stocks set to decline. There are some concerns that there will be a food crisis in 2022. Do you share these concerns?
I largely disagree with this statement, fundamentally we have seen various parts of the world remain in process to help combat some food inflation issues in 2021, and bearing normal weather global production will help cool these inflationary concerns a bit more. Another factor influencing food crisis/food inflation is global/local supply chain systems. COVID has drastically altered and slowed many supply chains, and hopes are that the worst of these supply chains stressors are behind us as well as there continue to be new procedures/vaccines/therapeutics in efforts to allow workers a safe environment to help levitate the supply chain bottlenecks.
Is the max COVID-19 pain behind us?
It seems so, and with that thought, the max supply chain stress should be as well, and thus with a bit of time, optimism and smart business practices, so too should be the max food inflation/food crisis issues as well. The outlier of course remains that of weather and mother nature- right now the markets are dealing with La-Nina in South America which can greatly alter global supplies and we continue to monitor 2022 weather for the Nothern Hemisphere as well- but overall as it stands right now the world is not getting any tighter vs what we saw in 2021.
HOW TO MANAGE PRICE RISKS IN A VOLATILE GRAIN MARKET?
Markets are changing quickly. It is difficult to follow commodity prices. How can grain producers, traders, and millers become more resilient to shocks and stresses in the grain supply chain? How can they mitigate trade risks?
The simple answer is to hedge themselves- whether that’s with different suppliers, different modes of transportation, different origins and yes of course hedging themselves in the markets from price risks. Each participant in the market has their own specifics, and thus a different approach to managing risks, but the point is simply, those who remain proactive on the subject are in a better position to adapt to a new set of risks when they become present. Managing price risk is exactly the service I provide to clients, whether it's futures, puts, calls, or a combination of all of them, commodity price risk management remains a crucial part in mitigating trade risks in today's volatile world. Also, the more aware traders are of market-moving events, the quicker they are able to adapt and change to it and manage potential risks as a result. It's always better to be proactive vs reactive.
Which region(s) will drive world grain markets in the future?
In the short term, it's all on South American weather and the La-Nina that remains present there, then it flips to U.S. and Black Sea weather for corn, soy and wheat influence. Given the nature of the commodity markets- it's typically that of supply-led issues that gain the most attention by the trade.
The pandemic has changed the settings of the market. The role of the states in the agriculture and food sector is increasing. Food nationalism is on the rise. Prohibitions, quotas and tax practices increase food security concerns. Do you agree that the world is in the era of nationalism and protectionism?
Yes, I would agree that some exporting/importing nations are in protectionism indeed- the rise of inflation and basic consumer needs have increased greatly around the world in 2021 and nations are indeed taking necessary steps to help protect domestic consumers. This does indeed alter the fundamentals of the market, but in times of great uncertainty, governments take actions to keep domestic consumers calm and offer stability. There are in some instances where fundamentals are healthy from the supply side, government actions push the domestic market to react in another and as such protectionism efforts are put in place for the wrong reasons- but they are what they are and price continues to do the work of moving the market. I do understand that some nations due to political, fiscal and monetary reasons have no other option, but free market overtime tends to do the job of demand rationing and creating opportunities for farmers and traders to respond. Likewise, oversupply situations push prices lower and with time free markets push farmers to produce less and consumers to consume more.
Russia introduced a wheat export quota. Do you think wheat prices would increase further with this decision?
Yes, Russia is implementing a wheat quota on wheat of 8 MMT from Feb 15th to June 30th. This has been largely advertised and well known by the market. Overall the market expects wheat exports to be 33-34 MMT for YTD and with these quotas, it seems this is still achievable. This can keep FOB prices firm as farmers likely remain reluctant sellers going into 2022, but this factor alone will not keep prices higher forever. We still have other global competing origins to consider, global demand flows and 2022 crop ideas to trade. Historically speaking, Jan/Feb tends to mark a seasonal top.
Do you expect Russia to modify its floating tax system for grain exports?
If FOB prices continue to go higher, yes I think they will. If prices go higher, Russia has to show an increasing tax as this remains a factor, albeit a small factor in efforts to cool domestic prices and help slow the flow of exports. It has already been communicated that if prices exceed $375, the tax multiplier jumps from 70% to 80%, and if prices exceed $400 then it jumps to 90%.
Another factor to consider would be further efforts to stimulate logistics to get grain to the regions that need it, and as always unofficial restrictions (can take on many forms) if domestic prices rally further as well.
KEY FACTORS TO WATCH IN 2022
What will be the key factors affecting the wheat prices in the coming months?
I think the largest factor over the coming months will be spring weather and fresh speculative money flows. 2021 was all about stimulus, and now 2022 is all about managing the inflation created and now efforts to tame it- this will have a big influence on the USD, and thus an influence on wheat since wheat is highly sensitive to USD movement. 2021 found far from perfect growing conditions across the Northern Plains, Canadian prairies, Western and Northern EU, and parts of Central areas of the Black Sea- the repeating thought each springtime is will mother nature allow for a good crop. World exporters' carryout/use remains with record tightness, so production levels will be watched in 2022.