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Macro Days

08 October 20219 min reading

The grain market is not so eventful these days, but macroeconomic news continues to influence the behavior of large traders. And small companies do react to the general trend, having ceased to understand where the grain market is heading. 

Elena Faige Neroba
Business Development Manager
Maxigrain

Record gas prices in Europe in the next season will result in an increase in the cost of growing grain because fertilizers have become more expensive. If China is not as active as last year - and while it is inactive - prices for grains and oilseeds could fall, but we continue to increase on the wave of inflation and farmers are not ready to make concessions. While Londoners are looking for gasoline, Louisiana residents are repairing elevators in the port area after a hurricane, and citizens in other countries are not bored either.

The OPEC Monitoring Committee recommended not to go beyond the gradual increase in production. Oil prices rise after this recommendation. OPEC+ will stick to its current plan to increase production by 400,000 barrels per day after the advisory group recommended keeping the current plan unchanged, delegates said. The conclusion of the Joint Ministerial Monitoring Committee, which oversees the cartel's production cuts, is made on the basis that OPEC + appears to have significant control over the oil market. Oil is trading at the highest in nearly three years.  

In Saudi Arabia, production figures are close to pre-pandemic levels, with the highest oil revenues since 2018, and her counterparts have largely joined together as part of a plan to gradually recover idle production each month. Washington is also pleased with the pace of supply increases, according to a US spokesman, who asked not to be named. U.S. oil production is still recovering from Hurricane Ida, which took a total of nearly 35 million barrels of Gulf of Mexico production from the market a month ago, equivalent to an increase in OPEC + supply in nearly two full months. The worry among major consumer countries is palpable as rising energy, food and metal prices threaten to trigger an inflationary surge that complicates current monetary policy.

As the massive restructuring of the Chinese developer Evergrande Group approaches, Beijing is seeking to limit the negative impact by signaling that it is ready to support “too big to fail” corporation. In just the last week, Chinese authorities have instructed financial regulators to force the country's major banks to ease lending for home buyers and bolster the real estate sector. Bloomberg says that they also bought out some of Evergrande's stake in a struggling bank to curb the spread of the "infection." At the same time, the central bank pumped $123 billion into the financial system in 10 days to boost liquidity.  

These measures underscore that China intends to do everything possible to limit the impact of the collapse of Evergrande, while it is not trying to directly save the developer, the situation around which has been agitating global markets for several weeks. This does not bode well for the bondholders - both on the mainland and for overseas - who hope to somehow escape from the Chinese government.

As per Bloomberg, the Hong Kong Stock Exchange has suspended trading in Evergrande shares along with shares in its property management division. The reasons for the suspension are not specified. Chinese markets are closed on Monday due to public holidays.    

China has a long history of dealing with the collapse of conglomerates like Evergrande. According to researchers at Citigroup Inc., an example is the restructuring of the HNA Group Co. in this year. Based on this, Beijing is likely to intervene, splitting up Evergrande's business and selling the assets to strategic investors. In such a scenario, bondholders would lose a lot in value, and equity investors would lose almost all of their investments. Even though the growth in the last week, Evergrande shares fell 80% in this year. 

            

The likelihood of a financial crisis is not yet high, but it will sharply increase if US Congress does not take action on the national debt. This issue is getting the attention of American investors and affecting the value of certain assets. Although, of course, few people believe that the country will default.

From politicians to Wall Street bankers, there are warnings about the risks of dragging out debt negotiations. Jamie Dimon, chief executive of JPMorgan Chase & Co (JPM.N), said the bank was preparing for "potentially catastrophic events." John Williams, President of the Federal Reserve Bank of New York, warned of a possible backlash from the market if a solution to the debt ceiling problem was not found.     

Plus, we've all heard about the coal problems in China. The lack of electricity led to blackouts and the need to save money; many processors, including grain and oilseeds, stopped their work altogether.

In China, there has been a tendency to reduce the processing of soybeans. Refining volumes have continued to decline over the past few weeks. Today, the country's soybean oil reserves are estimated at 850 thousand tons, which is 500 thousand tons less than last year and 610 thousand tons less than the average value for the last 3 years. Considering the fact that only a small amount of imported soybean oil has been contracted for September and October of this year, and also, in the context of the policy of restricting the use of electricity, the number of working processors will only decrease, which will support prices. If we also take into account that the price of rapeseed oil will remain high in the current season, then it is possible that in the near future we will see a rise in prices for soybean oil in China to the world level. 

In the current season, the cost of production of soybeans has increased significantly, therefore, taking into account the growth of the cost (in the current season, the increase in the cost of production is about 2000-3000 yuan per hectare) and the current market situation, the price of soybeans, at the start of the harvesting campaign, will not be lower than 5000- 5200 yuan per ton.  There is still about two weeks left before the start of an active harvesting campaign, but already now many farmers say that it is not worth expecting active sales at the start. Trading companies are confident that in the first months after harvest, it will be difficult for them to find the beans of the new crop. Many Chinese crushers, in order to reduce the cost of production, can partially replace non-GMO soy with GMO soy. The state today allows this to be done, using this mechanism as one of the ways to control the price level. 

The Chinese corn market is not such big today as it was a year ago. Recently, there has been a decrease in the sales of imported corn, which makes many importers worry. Importers are trying to attract customers by lowering prices. Small feed producers (most of the imported corn is used for feed production) today prefer Chinese corn because of the lower price, which forces importers to lower prices even more, even at a loss.  The increase in demand for imported corn has led to the fact that the price of Chinese corn, especially of not very good quality, also began to decline.

However, this situation may change. If after an active start of harvesting the quality of corn is low, then the price of last year's corn will immediately adjust. In addition, rains in the south of the country will affect the overall yield, the deficit will have to be covered with last year's supplies. 

While corn is pretty attractive not for Chinese farmers only but for Brazilians as well, on the other side of the world farmers prefer to plant more corn while the government zeroed imports duty.

Due to dry weather, Russia may plant less winter wheat this fall than expected, Reuters reported citing analysts. The dry weather also reduced its 2021 wheat crop. Winter wheat sowings have fallen further behind the average pace in recent days, following initial delays when planting started. Winter wheat usually accounts for 70% of Russia's crop and brings a higher yield than the spring planted crop. Farmers had sown winter grains on 10.8 million hectares as of Sept 30, down from 12.3 million hectares at the same date a year ago, according to the agriculture ministry. Preliminary data from Russian regions show that farmers would be able to sow about 19 million hectares of winter grains, the ministry told Reuters. The area totaled 19.3 million hectares last year.

Some analysts see this not as the effect of the weather, but as the reaction of Russian farmers to the floating duty, which actually took some of the profits in favor of the Russian budget. But the weather, even if there were no duties, is not conducive to sowing. In addition, the introduction of quotas is still ahead according to a scenario similar to last year's, which we have already been warned about many times. Same time numbers of the current crop are still very tricky. Who was more accurate – AgMinistry, USDA or FAS?

Anyway, despite the good harvest volumes in Europe and Ukraine, the grain quality remains not the best, and some of the importers have already lowered their quality requirements. Even China made concessions. But with Australia's good crop entering the Asian market, that could change.

In addition, crop failure in Turkey, Iran, Iraq, Syria, Pakistan and a number of other countries is making itself felt. It is possible that Kazakhstan can sell all its grain to foreign markets, and buy Russian grain for domestic consumption because the border for wheat between the countries is conditional, there is no duty, and part of the grain is traded illegally.

High prices are treated with high prices. But who will treat macro?


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