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Not corny

06 June 20218 min reading

Will corn still run the market or wheat became the queen? Defiantly we are staying just in front new portion of weather surprises and this story not over. So, let’s turn the page for the new chapter. It will not be corny.

Elena Faige Neroba Business Development Manager Maxigrain

After a four-month growth in the US stock market, investors are beginning to noticeably be nervous and insure themselves against a sharp decline in quotations. The CBOE Skew Index*, often referred to as the Black Swan Index, has skyrocketed to a record high since August 2018. It is similar to the VIX Fear Index. The main difference between the VIX and Skew is that the VIX is based on the implied volatility of the S&P 500 around the near-the-money (ATM) strike, while Skew takes into account the implied volatility of out-of-the-money (OTM) strikes. Like the VIX Index, the Skew Index can serve as an indicator of investor sentiment, but it measures the so-called “tail risks,” that is, the risks that the price of an asset or portfolio of assets will change by more than three standard deviations from the current price. Such dynamics in the Skew index suggest that investors are worried about the collapse of the S&P 500. The rise in inflation, which became one of the main market topics in May, may prompt the Fed to start cutting stimulus earlier than expected.

Bulls are trying to "feed" the grain market with weather news: in the east of the United States, it rains with thunderstorms, in Brazil the drought continues to damage corn crops, in Ukraine rains may affect the quality of the future harvest, in Turkey due to the drought the forecasts for grain production have also been reduced. Some uncertainties still could come from the Pakistanian side where imports interest could reach 4MMT which is still lightly covered. The market is steel in deep backwardation and weather concerns doesn’t over.

*CBOE Skew Index. Source: Bloomberg

The downward adjustments in corn production in Brazil continue. The insignificant precipitation did not improve the condition of the crops. Production forecasts are at 91-96MMT, the most pessimistic are below 90MMT, while there was no significant adjustment in the May WASDE report and expectations were at 102MMT. China temporarily pauses bulk purchases and ends the planting campaign by increasing corn acreage.

Last week Brazil's Ministry of Mines and Energy announced that the water level at the country's hydroelectric dams is dangerously low and that measures to reduce electricity consumption may be required. The Electricity Sector Monitoring Committee indicated rainfall from September 2020 to May 2021 was the lowest since registration began 91 years ago. Hydroelectric dams in west-central and southeastern Brazil received 63% of their normal rainfall during this period. In northeastern Brazil, precipitation makes only 38% of the norm. The forecast for corn production in Brazil is extremely pessimistic, the market expects that in the next WASDE report the production figure will be adjusted downward to 95-97MMT. Low temperatures in southern Brazil may further damage crops, Soybeans and Corn Advisor reports. The Brazilian National Meteorological Service indicated that the coldest air of the season resulted in a bit of frost in western Parana, and there could be more frosts on Wednesday nights in southern Brazil, especially in the highlands of the states of Santa Catarina and Rio Grande do Sul.

The closest date for the revaluation of the planted area in the United States is June 30, and the market expects that the area under corn will be larger than it was announced in the March report, which said that farmers intend to plant 91.1 million acres of corn and 87.6 million acres soybeans. During the sowing campaign, the ratio of the value of the last soybean and corn contracts in the calendar year pushed farmers to sow primarily the latter. Given the high planting rate, the market expects up to 94 million acres of corn to be planted. In addition, the Soybeans and Corn Advisor suggested that the USDA's 179.5 bush/acre corn yield trend line may be optimistic given the current drought in the northwest corn regions and estimates that there is now a potential of 177.5 bush. /acre.

A "floating" duty has come into effect in Russia. For the current week, for wheat, it is $28 per ton, since the contracts that are included in its calculation were concluded at prices from $230. Next week, the duty may be $30-31 per ton and goes higher.

Wheat production in Turkey could be well below WASDE estimates. According to local analysts, the wheat harvest in the new season may not exceed 16 MMT, which will create an additional 2-3 MMT deficit amid a gradual recovery in demand for processed products. To date, a harvesting campaign has been started in Turkey and it is possible that import duties will be canceled in the nearest future.

Russian analytical agencies have again started to raise forecasts for wheat production in Russia. Today they range from 79.5 to 82MMT, while WASDE has estimated potential at 85MMT. The actions of the Russian government aimed at lowering the domestic price had a negative impact on the export potential. Russia may enter the new season with huge reserves of wheat, which are estimated at 10-12 MMT. The market does not exclude that the practice of export quotas will remain in the second half of the season, while the mechanism for calculating the duty will be improved. Sovecon told Reuters that it expects Russian wheat exports to decline from 37.7MMT in the current season to 36.6MMT in 2021/22. Something tells me, duty and quotations will stay with us during the new season and could be lightly changed by the government but not reversed. By the way, despite height planting areas in Russia, weather conditions cut some yields potential and partly shifting to spring crops will not help in full charge. Ukrainian crops look good but rains do not always make grains. Better weather conditions in France have improved the state of wheat crops. In the new season, it is predicted that the EU will seriously compete for the Black Sea grain in traditional markets.

Wheat imports to China from June 2020 to March 2021 amounted to 8.76 MMT, which is 147% more than in the same period last year. The main suppliers of wheat are Australia, France, Canada, and the USA. In the 21/22 season, China plans to import about 8 MMT of wheat. The main factors behind the growth of imports are the restoration of the pig population, the replenishment of the state reserve, as well as a change in the formulation of feed - the state urged to reduce the share of corn and meal. Will they or not – depends on ASF outbreaks and storage capacity.

VEGOILS MARKET

Soybeans rise on news of potential crop cuts in China in favor of corn and US weather. Many areas of China's Heilongjiang Province are seeing significant declines in soybean acreage, China Oilseeds reported. On average, the sown area has been decreased by 20-30%, and in some regions even by 40%. Farmers receive additional payments for growing corn. In the North-East of the PRC, the sown area for soybeans will amount to 2.5 million hectares, which is 17% less than a year earlier. The total yield should be 5.33 million tonnes of soybeans. At the same time, there is a significant decrease in the price of soybeans. A significant decrease in prices is also observed for contracts for delivery in September of this year, primarily, this is due to the statement of the Premier of the State Council of the People's Republic of China, Mr. Li Keqiang, about more careful control over prices in the grain market. In general, the volume of trade in soybeans has significantly been decreased, many trading companies have stopped purchasing and are now only selling their stocks. Customers began to impose stricter requirements for product quality, the number of product returns has been increased by several times. In the south of the country, prices also continue to decline, despite the fact that there are already very few ending stocks left. Despite modest gains on the Dalian Stock Exchange, soybean oil prices remain very low on the real market in China. The main factors are a decrease in demand from end customers (a seasonal phenomenon), an attempt by factories to sell off stocks, a low price for soybeans and regulatory policy from the government. The price of GMO soybean oil, on the exchange in Dalian, was 9136 yuan, while the price of non-GMO soybean oil is about 10,300 yuan or 1289 USD CIF China port.

In Ukraine, due to the lack of attractive export demand, crushers began to stop actively. Traditionally, this happens a little later, but this season, due to the lack of raw materials and the inflated expectations of farmers, processors have found it easier to stop production earlier. In this situation, the export of sunflower oil from Ukraine will not exceed the limit of the Memorandum, and domestic prices for sunflower of the current crop will significantly decrease. What is key for these days – sunflower needs up to 2500 C degrees per season. And keep in mind – I’m still not wearing my sundials.

Will corn still run the market or wheat became the queen? Defiantly we are staying just in front new portion of weather surprises and this story not over. So, let’s turn the page for the new chapter. It will not be corny.

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