Nothing passes without a trace

09 January 202312 min reading

The past year has featured plenty of ups and downs due to geopolitical turmoil, significant drought in different parts of the world, mounting recession fears and much more. Chicago wheat price was the highest since 2008. Corn prices traded at the highest level since 2012, as did soybeans…And 2023, most likely, will not be easy. The beginning of the 20s of the 21st century will definitely be included in history and economics textbooks. “Everything passes, and this will pass. But nothing passes without a trace”.

It seems that the events of the past year have reminded us how fragile our plans can be and how short-lived our predictions can be. Geopolitics and nature are the king and queen of the ball. Despite attempts to decipher the genome and fly into space, humanity has turned out to be completely dependent on classical energy sources. The world may face the issue of hunger not only in countries that have not reached even an average level of development. The number of food-insecure populations is increasing rapidly throughout the world. It is difficult to define the word of the year, but in a global context, it is most likely “inflation”. 

The flywheel was started by the careless populist policy of the governments of the vast majority of countries during the corona crisis. The incessant printing of money has aggravated all the problems of humanity. It seems that humanity has done something “wrong” and the universe is persistently sending us signals. The biggest war since the middle of the last century was added to the series of floods and droughts that spread across the planet, nullifying the efforts of scientists related to agricultural production. Against this background, global inflation has regained its position as an enemy of economic progress after almost 40 years of absence. Due to the fact that even in the most developed countries of the world, the rate of price growth has reached a multi-year peak - about 10% - a whole generation for the first time in their career had to worry about the rapid increase in the cost of living, which they were not used to. The balance is disturbed, and this leads to unpredictable consequences. 

The past year has featured plenty of ups and downs due to geopolitical turmoil, significant drought in different parts of the world, mounting recession fears and much more. Chicago wheat price was the highest since 2008. Corn prices traded at the highest level since 2012, as did soybeans. Cattle at year-end were the highest since April 2015. US President Joe Biden has called inflation “the bane of our existence”, making its victory his top economic priority. Amid geopolitical tensions, the US released strategic oil reserves in an attempt to lower prices. In Europe, people who had lived stable lives for decades reacted painfully to even minor changes in their bills. And those who lived badly did not lose anything. Not for the first time in the new millennium, central banks are acting synchronously - raising rates, but so far, this synchronous swimming has not shown clear results. Frightened people continue to demand higher wages. Therefore, the word of 2023 may be “recession”. The FT believes that it is inevitable, even if overall inflation rates start to fall.

The world seems to live in two parallel realities: valuable ones continue to research and testing, dresses and sports cars still cost millions, private jets and yachts are still being ordered, and food production is becoming more expensive. Markets have become extremely sensitive. 

Today, as you read this post, severe cold and wind across the US Plains and Midwest could affect the US wheat crop and stocks are headed higher again. In the northern United States, temperatures were below normal with life-threatening wind chills of -46 degrees C. Thus, prices for already expensive U.S. wheat has rallied significantly on continued concerns that a sharp cold snap in the Midwest and Plains will lead to some problems with the 2022/23 winter wheat crop being killed. Mostly dry weather was expected in the US HRW wheat belt before another storm system brings snow to the central Plains, space technology company Maxar said in a daily weather note. Wheat firmed on Friday, on concerns of winter storm damage to U.S. wheat crops. However, over the first week of 2023, most parts of the Midwest and Plains will receive at least some measurable moisture, with the Mid-South to get the biggest soaking. The outlook predicts more seasonally wet weather for the western Corn Belt and upper Midwest between January 6 and January 12, with widespread warmer-than-normal conditions across the central U.S. during this time.

Argentina was 91.4% harvested for their 22/23 wheat crop according to BAGE. The Rosario Grains Exchange recently lowered its output forecast by 2.5% to 11.5 MMT citing the drought. USDA’s Dec WASDE had Argentina with a 12.5 MMT crop compared to 15.5 MMT in November and 22.15 MMT in 21/22. Thus, traders were monitoring weather forecasts pointing to high temperatures and light showers in the coming days, along with concerns over planting delays. The question is whether the current La Nina cycle will change into an El Nino cycle so that we can get more normal rains in South America and the U.S., that will allow us to rebuild U.S. and world stocks.

Russia’s Rosstat forecasted the 22 wheat harvest there at 102.65 MMT. In this context, Russian Sovecon is anticipating record or near-record export volumes during the second half of this marketing year. The consultancy indeed slightly raised its 2022/23 wheat export forecast to 44.1 MMT, citing high global prices, large domestic stocks and a weakening ruble. As winter weather persists, rail performance will continue to suffer, with some traders saying trains are being delayed for up to a week in some places, with no resolution in sight until temperatures rise.

Global corn markets may face a corn shortage in the first quarter of 2023, as rapidly declining export supply in Brazil is coinciding with delayed and weak harvests in Argentina, alongside a sluggish shipment pace from Ukraine, leaving the US as the only major viable option, Argus said. Union Pacific Corp said it embargoed rail traffic on its lines in Iowa, Minnesota and Wisconsin starting Dec. 29 due to recent severe weather and forecasts for snow and ice for this week. Along with Union Pacific, CSX Corp warned of delays earlier past week. 

Dalian Chinese futures were mostly higher on Monday while the US markets were closed. CFTC’s weekly Commitment of Traders report shows corn spec traders were buying. The managed money funds closed 11.4k short contracts and added over 34k new longs during the week that ended 12/27. That left the group 159,315 contracts net long. Commercial corn hedgers closed 22k longs and added 22.5k new short hedges for a 44,890 contract stronger net short of 388,045.  Weekly Export Sales data showed 781,583 MT of old crop corn was booked during the week that ended 12/22, close to trade expectations. That was up 22% for the week, but down 37% from the same week last year as noted by Barchart.

At the current pace, US corn exports would total 9.3MMT by the end of December, implying a shipment potential of 43.4MMT from January-August. But the US’ genetically modified corn crop may turn away potential buyers, particularly in Europe. EU buyers depend heavily on Brazilian and Ukrainian supply, which totaled a combined 11.85MMT in 2021-22, about 73% of the bloc’s global imports at the time. The EU’s reliance on Brazil and Ukraine has increased further so far in 2022-23, both in volumes and share, having already received 12.44MMT from both origins since July, 92% of the bloc’s global receipts during the period. This puts the EU at a greater risk of a supply shortage than other parts of the world and could prompt the region to seek volumes from other origins at less competitive prices or turn to alternative feed grains as per Argus

From the point of view of food consumption, it is impossible not to mention China. Xi Jinping wants Beijing to speed up efforts to achieve self-sufficiency in agricultural technology, identifying the development of seeds and equipment as areas to focus on, state media reported. “It is necessary to monitor the advanced achievements of global agricultural science and technology,” - from the mouth of the leader of China, these are not empty words. The leader heavenly called on China’s agricultural sector to “vigorously improve” its science and technology through more efficient innovation. Xi urged the sector to address innovation challenges, such as the speed of translation into commercial applications and the lack of collaboration between research groups.

India is becoming increasingly visible on the world stage. India is expected to become the third-largest economy in 2035 and the third-largest in the world by 2032. Perhaps the population of India will become the largest population in the world. And people must be fed first of all. Its officials believe that wheat production in the country will increase to 112 million tons due to favorable weather conditions and an increase in crops. India is one of the world’s leading producers of wheat, but the vast majority of this production is consumed domestically rather than entering the export market. Wheat there, like many things, still depends on manual labour, so the effects of weather are extreme and quality is unpredictable. India has announced that it will spend the equivalent of US$24.2 billion to provide free food grains to more than 800 million poor citizens. The program is a conglomerate of two previous programs that provided pandemic relief in the form of free or subsidized food grains. Notably, government sources in India announced that the state will offer 2.0 to 3.0 million tonnes of wheat from reserves to flour millers and biscuit makers to reduce domestic prices. As market prices rose, government purchases of wheat for the country’s food program fell by 53% to 18.9 million tons.

And all this is against the background of the energy crisis. Russia, in another attempt at manipulation, may cut oil production by 5-7% in early 2023 in response to price restrictions, Deputy Prime Minister Oleksandr Novak said. According to analysts’ estimates, Russian Baltic oil exports could fall by 20% in December compared to the previous month after the European Union and G7 countries imposed sanctions and capped the price of Russian oil from December 5.

Meanwhile, both crude oil demand and production could fall over the next few days due to shutdowns from a powerful winter storm that has cascaded across a wide swath of the United States. Swiss bank UBS expects prices could return to above $100 a barrel next year due to production cuts in Russia and the easing of COVID-19 restrictions in China. The National Health Commission said on Monday that China is lifting the quarantine for travelers entering the country, reversing a rule that has been in place since the pandemic began three years ago. This led to optimism about increased demand from the largest importer of crude oil.

A weaker dollar makes oil cheaper for holders of other currencies and usually reflects investors’ greater appetite for risk. “The price of reducing inflation to a more comfortable level is the worst growth prospects for several years ahead,” CEBR added. So far, the East Asia and Pacific region is expected to account for more than a third of global production by 2037, with Europe’s share falling to less than one-fifth. At the same time, China will not be able to catch up with the US economy until at least 2036, which is six years later than expected. China’s economic growth has been slowed by its zero-tolerance policy on the coronavirus and growing trade tensions with the West. CEBR predicts that the consequences of an economic war between China and the West will be several times more serious than the consequences of the Russian invasion of Ukraine.

U.S. crude oil futures registered a second straight annual gain after a wildly volatile year marked by tight supplies due to the Ukraine war and then sliding demand from China. For the end week session, U.S. crude settled up 2.4% or $1.86 at $80.26 per barrel and Brent finished at $85.91, up $2.45 or 2.94% on the day. Oil prices swung wildly in 2022. Prices surged in March when the war started in Ukraine, with international benchmark Brent reaching $139.13 a barrel, the highest since 2008. Then, prices cooled rapidly in the second half as central banks hiked interest rates and fanned worries of recession. For the year, Brent gained about 10%. U.S. crude rose nearly 7% in 2022. 

Investors in 2023 are expected to keep taking a cautious approach, wary of interest rate hikes and possible recessions. A survey of 30 economists and analysts forecast Brent would average $89.37 a barrel in 2023, about 4.6% lower than the consensus in a November survey. U.S. crude is projected to average $84.84 per barrel in 2023, down from the prior view. While a jump in year-end holiday travel and Russia’s ban on crude and oil product sales has supported crude, tighter supply will be offset next year by declining fuel consumption due to a deteriorating economic environment. Additionally, while China’s oil demand is expected to recover in 2023, a recent surge in COVID-19 cases has dimmed hopes of an immediate boost in barrel buying. Meantime, in an indicator of future supply, the U.S. oil and gas rig count rose 33% for the year, energy services firm Baker Hughes Co said in its latest report.

These processes will certainly lead to the displacement of the population, and changes in supply chains, but will also push the development of science. However, you should not expect quick relief. This year, most likely, will not be easy. The beginning of the 20s of the 21st century will definitely be included in history and economics textbooks. “Everything passes, and this will pass. But nothing passes without a trace”.

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