Non-eventful markets are boring, as no trader likes to sit on his hands for a long time. Changes in commodity prices is what fuels the need for traders to excel and to find themselves on the right side of the trend time after time. Having said that, few were prepared for the increasingly volatile grain markets come mid-July, which marked the collapse of the Black Sea export corridor initiative for the Ukrainian grain, and furthermore, increased military action by Russia against Ukrainian sea ports and Ukrainian port infrastructure on the Danube river. While the markets could foresee and prepare themselves for the former, the latter came as a nasty surprise. Ukraine is often called the bread basket of Europe, and Chart 1 below, that compares monthly grain exports from Ukraine to grain exports of another grain exporting giant Russia, shows why. The chart illustrates the export situation pre-war, at the onset of the war, after the establishment of the grain export corridor and the actual exports of two countries following its disruptive end. 

In the years preceding the Russian aggression of Ukraine, the latter was a clear leader in grain exports. The war put an end to this leadership. Thanks to the United Nations and Turkey brokered agreement that allowed both Russia and Ukraine to export grain and foodstuffs, Ukraine was able to continue grain exports until the expiry of the deal on the 17th of July, 2023. Russia has taken over the position of the world leader with record wheat exports of 45,5 million tons in the 2022/2023 marketing season (i.e. July to June) according to USDA estimates. Currently, the spread between the offers and the bids has widened with Russian sellers unwilling to show offers below USD 260 per ton for the September position. The increase of Russian tax by about 15% throughout Aug 23-29 hampers Russian wheat exports, making Romanian wheat more appealing to buyers. Consequently, GASC booked one Panamax of Romanian wheat for the Oct 5-20 shipment at $256 Fob on August, 22. Notably, French wheat offers were not far off.  


CHART 1

Additionally, India is reportedly in confidential talks with Russia for the biggest-ever grain deal between the two countries to supply of some 8-9mn tons of wheat, even though India is reportedly demanding a very deep discount, according to a Reuters report on August 17. The discussions are anticipated to continue for several more weeks. India has been self-sufficient in wheat for years, but extreme weather in the last two years has hurt domestic production, and Indian wheat stocks at government warehouses were at 28.3 million tons on August 1, some 20% below the 10-year average. (Reuters).

Elsewhere, the weather is also playing a major role in shaping grain markets. Rainy weather and cooler temperatures across northern Europe and the UK just as farmers were getting ready to harvest winter wheat have raised concerns about the quality with protein spreads widening on the back of these concerns. Also, a significant portion of the Ukrainian wheat harvest – currently estimated at 22 million tons, which is higher than last year’s figure of 21,5 million tons and much below pre-war 2021/22 wheat crop of 33 million tons, is downgraded into feed due to low protein content. As a consequence, this has widened the premiums for high-protein wheat. 

At the same time, we have seen extreme weather conditions with record temperatures and fires over parts of South Europe this season. Traditionally, Spain is the European Union’s grain imports leader, accounting on average for 70% of the EU’s annual grain imports. Additionally, the combination of poor winter grains production for wheat and barley and lower-than-anticipated area planted to corn (250,000 hectares) and rice (59,800 hectares) in spring is expected to keep Spain’s total grain production to barely 12 million tons. Yields are expected to be down well below 2022/23 levels, when limited rainfall already resulted in a poor domestic grain crop, according to USDA. 

Over in the US, extreme hot temperatures combined with not a lot of rain in the forecast are back in full force across the Midwest through the first week of September. This ongoing extreme weather situation with triple-digit heat in parts of the US Corn belt is not conducive to corn ratings and, subsequently, to rosy yield expectations. Furthermore, this could damage the US soybean crop during the crucial development window. See the development of the crop ratings for US soybean and corn conditions in Chart 2. 


CHART 2

Knowing that the US corn crop was already heavily stressed by dryness through June, the market was waiting for insights about projected grain supplies and the effects on commodity markets from the Annual Pro-Farmer Crop tour, covering seven states, which historically has a significant influence on the market. Pro-Farmer estimates the U.S. corn crop at 14.960 billion bu. against 13.759 billion bu. last year’s estimate with an average yield of 172.0 bu. per acre against 168.1 bu. per acre estimated last year, and the U.S. soybean crop at 4.110 billion bu. against 4.535 billion bu. last year’s estimate with an average yield of 49.7 bu. per acre against 51.7 bu. per acre last year. 

International Grain Council (IGC) poured some oil on the fire recently, when it left its 2023-24 world production estimate unchanged this month at 784 million tons, down from 803 million a year earlier, while forecasted ending stocks dipped 2 million from July estimate to 261 million, which is a whopping 21-million ton or 7.4% decline from the previous year.

On the other hand, Asian importers continue to be absent from the market amidst mounting economic malaise. China’s property giant Evergrande filed for bankruptcy protection in a U.S. court and another major real estate developer is approaching default. This will lead to strains on China’s financial system and does not bode well for economic growth.

So where do we go from here? It should be noted that grain markets have been down trending since the fall 2022 until Russia pulled out of the grain deal. Since then, there has been more unclarity about the availability of Black Sea supply, freight rates have jumped higher on the back of drone attacks, as risks remain high. There is mounting concern about the dryness in Argentina. And quality concerns for the EU wheat is a big issue. The interplay between buyers and sellers should be watched closely in the coming weeks to see either a suggestion of further direction. With all being said and done, grain markets tend to remain precariously volatile offering high risk/reward opportunities for traders who are successful in managing the risks.