Keep Calm

13 May 202010 min reading

“The governments of almost all countries in an attempt to create stocks reminded people who buy all the products in supermarkets. Empty shelves only add panic, and people, giving in to the hype, are ready to pay any price, if only to sleep peacefully. Wheat, as the main grain consumed by man (not counting rice), was actively growing in price, exporters were first satisfied, but then they themselves expressed concern: What if they themselves are not enough?”

Elena Faige Neroba Business Development Manager Maxi Grain

Not only do people behave differently in isolation. Corn and wheat behaved completely differently during the quarantine. And this is understandable, because wheat is primarily food, and corn is a source of ethanol and animal feed.

But let's start with the most sensational event of the past month. The recent one-day WTI negative value is associated with the imposition of several factors. Firstly, oil is in overproduction, and demand is in no hurry to recover. For example, aircraft began to fly 70% less, and this is not the only source of falling demand for fuel. This led to an increase in stocks, and now it is more profitable to sell storage facilities than oil itself.

Secondly, the deal to reduce production began to be implemented only on May 1 . On April 20, WTI futures were preparing for expiration, and it, unlike Brent, was deliverable. No one wanted to buy, and the story is over so that the May crude pays the seller. On Tuesday, new contracts were already trading in a relatively normal price range, although some traders, in an effort to cover yesterday’s losses, began to sell part of new contracts, which supported a downtrend.

Third, Saudi Arabia continuing la price war despite the deal, arranging the sale and forcing competitors to European and Asian markets. Physical contracts are traded ovalis of $ 11-13 per barrel. I hasten to reassure you: from this week they stopped doing it.

With a decrease in production amid weak demand, prices will be kept until storage space is vacated. That is not for one week. By and large, even in the most optimistic scenarios, demand will recover closer to the third quarter of 2020, and the supply must be further reduced so that oil returns at least to the level of the end of 2019.

WHEAT The governments of almost all countries in an attempt to create stocks reminded people who buy all the products in supermarkets. Empty shelves only add panic, and people, giving in to the hype, are ready to pay any price, if only to sleep peacefully. Wheat, as the main grain consumed by man (not counting rice), was actively growing in price, exporters were first satisfied, but then they themselves expressed concern: What if they themselves are not enough?

Russia limits the export of wheat (and other grain) outside the EAEU for April-June at 7mm. Exporters did not use the quota - there is simply no such transshipment capacity in the country, they booked it. Those who didn’t guess or didn’t have time to do it remained dissatisfied and tried to complain to the Ministry. There were even ideas derive from the quota of wheat and barley, called on the government remained adamant. In parallel with this, Kazakhstan is increasing the export quota for May to 250 kmT.

Traders suggest that 1) it will be exported through the EAEU countries, there is no ban on export inside, nor is there a ban on re-export from participating countries and 2) if you declared but did not select a quota, then it is returned to the calculator.

Ukrainian exporters are obedient, wheat goes slowly, fitting into the estimated norms. Amid the stress, because of the desire to replenish the stocks of importers and the uncertainty with quotas, the market grew rapidly, but everything fell into place.

The potential restriction of Ukrainian corn exports at 29.3 is unjustified, and more like an attempt to create a stir similar to the wheat story. But the ministry listened to the voice of the market and rejected this idea.

The "oil in the fire" of wheat was added by the absence of rain in Europe and the Black Sea region. The threat of a significant reduction in yield was worse than the not yet sown, but already potentially large numbers of Argentine or Australian wheat.

But already at the beginning of May, buyers were “full”. Rains that have already passed in Europe, the Black Sea region and Brazil, and last a few more days, reduce the likelihood of crop loss due to drought. Warm and dry weather in Argentina contributes to the harvest of soybeans and corn, and in the United States - activates sowing of these crops.

In the north and in the center of Europe, heavy rainfall occurred, which significantly improved the provision of moisture to winter and spring crops. During the week, moderate rains will be here. Also, the southeastern part of Europe and Ukraine was covered by a cyclone that brought 10-30 mm of rainfall, which improved the condition of winter wheat crops. It will rain throughout Ukraine, in the central regions of Russia, in particular, in the Stavropol and Krasnodar Territories, where there is a moisture deficit in winter crops. In the south of Odessa region, part of winter and spring crops died due to lack of rainfall, and rains will no longer be able to restore crops. Moderate rains will improve the condition of winter wheat crops, which have stopped their development, and will contribute to the emergence of spring crops, sowing of which is almost complete.

Traders are worried about the many-week lack of rainfall in Brazil, as a result of which the crops of the second crop are affected. This week, weather forecasters promise moderate, in some places heavy precipitation, which will improve the conditions for pollination and filling of corn. At the same time, there is too much corn in the world, and it will not give substantial support to prices.

In Argentina, dry and warm weather will replace long rainfall next week, which will restore the harvest of soybeans and corn, whose exports have slowed due to low water levels in the Parana River.

In Western Australia, rainfall that has already passed and will continue will improve soil moisture and winter wheat

yield forecasts. In East Australia, enough rain increases the potential for a new wheat crop.

Wheat export from French ports remains quite active, but traders note that buyers are more interested in the grain of the new crop.

The American wheat market is falling on the news about improving weather conditions in the EU and the Black Sea region, which increases the potential of the new crop. Chicago July Wheat futures fell to their lowest level since March 19.

Argentina offers wheat with a protein of 11.5% of the old crop with shipping in June at $ 235 / t FOB Up River, and a new crop with shipping in December at 200 $ / t FOB Up River.

Due to concerns about a possible next increase in export duties, last week Argentine farmers sold 485 thousand tons of new crop wheat, while a year ago this figure was only 46 thousand tons. The Moldovan Ministry of Agriculture reported that as a result of the drought, the country could lose 40- 50% of the new wheat crop. Next week, the agency promises to publish detailed indicators of grain production. In Romania, part of the crop was also severely affected by the drought. Rains brought price relief but ahead is projected to be very hot and dry summers.

CORN Unlike wheat, with the introduction of strict quarantine measures, it feels extremely bad. Production is growing year by year. The USA and Ukraine have increased the area. Consumption is falling at a record pace since the ethanol market is dead. In addition, do not forget about the second factor that puts pressure on the American corn futures market. Meat production is declining due to the suspension of factories. HoReCa practically does not work, which means there is no demand for livestock. Feed intake is falling. The US export potential for corn may well exceed expectations, and the world will enter the new season with large runoffs.

But nothing can last forever. A slight weakening of quarantine measures affected the activity of the population. The demand for fuel increased slightly. The recovery in oil prices was somewhat supported by stock exchange quotes of corn in the United States, although prices in the physical market remain low due to lack of demand.

Oil quotes of the first week of May grew amid data on stocks and the restoration of enterprises in some states, which should intensify the demand for fuel. Over the week, US oil reserves grew by 9 million barrels, distillates - by 5.1 million barrels, while gasoline reserves fell by 3.7 million barrels.

May corn futures under pressure from data on a decrease in ethanol production and lower purchase prices in Asian markets, however, supported by rapid growth in oil prices at the end of the session, they recovered.

In a week, ethanol production in the USA fell by 5% to 537 thousand barrels/day, which corresponds to the consumption of corn in volume of 1.43 million tons/week, whereas last year this figure averaged 2.8 million tons.

The news of the purchase by a Taiwanese processor MFIG of a tender for another batch of Brazilian corn for shipping in August at a price of $ 171 / t C&F increased pressure on prices in the physical market. Prices for Brazilian corn fell to $ 152 / t FOB, for American - to $ 141.25 / t FOB US Gulf.

In Ukraine, there is an imbalance in the price of corn. On the FOB basis, they are gradually decreasing for shipping in May-June, while exporters at the port keep them at a high level since traders need to close previously concluded contracts, and manufacturers hold back sales in anticipation of higher prices and amid high purchase prices from domestic processors Corn market globally fills pressure bearish factors: lower oil prices, increasing import duty on corn in the EU and the good pace of planting in the United States and Ukraine on the background of favorable rainfall. Warm weather with moderate rainfall in the Midwest allowed the sowing of corn to be intensified. As of May 3, it sowed 51% of the area compared with 39% on average over 5 years at this date. Until the end of the week, farmers will try to complete sowing, because then heavy rains will begin.

Another decrease in corn prices in the United States led to an increase in import duties on corn, sorghum and rye in the EU, first to 5.27 € / t , and then to 10.4 € / t, since US prices are the basis for calculating import customs EU rates.

This will slow down corn imports in the EU, which has now reached 17.471 million tons and is 14% lower than the corresponding indicator for 2018/19 MP. The increase in duties reduces the export competitiveness of Ukrainian corn, which puts pressure on its price. However, even in the absence of import duties and logistics costs, demand for Romanian corn in the EU is low, since Brazilian corn is proposed to be shipped in July-August at a much lower price.

As of May 5, in Ukraine 3.96 million ha were sown with corn or 73% of the planned 5.39 million ha. Recent rainfall will have a positive effect on crops and improve prospects for a future crop.

NOFI, a South Korean processor, purchased two cargoes of Brazilian corn this week for October shipping, confirming a gradual decline in grain prices for the new crop due to oversupply.

I would like to believe that the market has already been ill or will soon recover.

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