“The grain market continues its inertial movement in an upward trend. Insignificant precipitation in the East of the USA and in Brazil did not reduce the degree of bulls' mood, but as the release date of the May WASDE report approaches, the behavior of players on the stock exchange becomes more cautious.”
Elena Faige Neroba
Business Development Manager
The shortage of raw materials is due to the emergence of the world economy from the coronavirus crisis. Nearest contracts cost more due to hopes of the world economy’s recovering. There are still lots of non-commodities money on the market, especially in grains: funds net positions huge, daily prices rise but cash market is much weaker. The pace of rally gets slower, but it is still with us. The market is overliquid on weather and nobody knows for sure what could happen next.
Demand for all commodities from oil and copper to grains
is growing, exacerbating backwardation, which has already reached record levels in the past fourteen-plus years. It is based mostly on production concerns and uncertain consumption. Some commodities repeating 2007-2008 scenario.
This indicates a shortage of raw materials, the demand for which is due to the recovery of the world economy from the coronavirus crisis, but it’s not for sure. Goldman Sachs predicts commodity rally will be increased by another 13.5% within a year.
The grain market continues its inertial movement in an upward trend. Insignificant precipitation in the East of the USA and in Brazil did not reduce the degree of bulls' mood, but as the release date of the May WASDE report approaches, the behavior of players on the stock exchange becomes more cautious. Some market participants have pointed to a record long position in corn futures on the Chicago Exchange as a factor that could push prices down at some point in the nearest future.
According to SP Global Platts, the risk of African swine flu outbreaks in China cannot be ruled out, as many believe China may be underreporting these statistics. Any outbreak could potentially curtail the growth of grain purchases in the country. Corn remains the market driver.
Planting rates in Europe and the Black Sea region are lagging behind the average, the US has accelerated significantly and is now ahead of the five-year average, and the drought in Brazil remains a key factor in supporting prices. In the domestic market of China, the United States and Brazil, corn prices remain at record highs due to demand from the livestock sector as well.
Light rainfall in Parana, one of Brazil's main safrinha growing states, does not reverse the effects of the increasing drought. The market expects the USDA to cut its forecast for corn production from 109MMT to 100MMT in May, but some analysts believe that production in Brazil could reach 92-97MMT. Major livestock producers in southern Brazil are already importing corn from neighboring Argentina and Paraguay to keep their factories running, and they are asking the government to take a more active role in increasing grain production. According to market participants, in the near future, the import demand in Brazil may reach 3MMT. With very limited corn supplies and record high domestic corn prices, Brazil's Agriculture Minister announced last week some financial incentives for farmers to increase the production of corn and grain sorghum. Some farmers already started to washout contracts.
According to the USDA, 10.67MMT of corn was used in the US for ethanol production in March, up 26% from February volumes, when production was hit by frost and snow and was 2% up last year level. The USDA currently expects 125.7MMT of corn to be used for ethanol production this marketing year. Typically, ethanol production accounts for up to 40% of US domestic consumption. Ethanol exports to China are above average, which together with the increased shipping rates creates tension in the domestic market. In turn, due to a shortage of raw materials, Brazil reduced the requirements for the ethanol content in fuel to 10%, and India switched to the use of rice until March 31. Planting rates in the United States have been accelerated significantly, reaching 46% of planned acreage, which is above the five-year average and well above last week's data. In Ukraine, only 20% or 1.07 million hectares are sown, but satisfactory weather conditions allow market participants to state that the harvest may exceed 36MMТ US corn shipments in the week leading up to April 29 were above average market expectations, creating additional support for prices. Despite this, there are about 18 weeks left until the end of the current marketing year in corn and 12.5MMT has not yet been shipped to China. This means that exports should average about 672kMT per week from now to August. This is significantly higher than the recent rate of about 0.5MMT per week and is quite difficult from a logistics point of view, which raises concerns about possible defaults. And the spirit of contract cancellation is here. Around of May WASDE report, which will show new crops expectation, May contracts will reach expiration. Same days. Too much of uncertainty. Top risky. If I were a hedge fund I will cut position and fix some income.
Global wheat prices are bolstered by soaring corn prices, which have reached record highs as strong demand and supply concerns stemming from weather-related woes weigh on both sides of an already tense balance, narrowing feed wheat to corn price ratios to unprecedented low levels.
Farmers and traders in Romania believe that wheat production in the country will recover from a sharp drop caused by last year's drought. In the current season, production is estimated at 6.4 MMT, which is 38% less than last year. In 21/22, due to the expansion of areas, mild winters and a sufficient level of moisture reserves, it can reach 10 MMT, which, with an internal consumption of 2.5-3 MMT, will increase the supply of Black Sea grain, especially to the Middle East and North Africa. The National Institute of Meteorology said that moisture reserves in most regions of Romania at a depth of 1m should remain within satisfactory limits, close to optimal.
Russia sowed 1 million hectares or 8% of the expected area under spring wheat, the situation with winter crops is still ambiguous. In Ukraine, the sowing of spring wheat is almost complete, but its area is only 2% of the total area under wheat. Winter crops in most regions are in satisfactory condition, and the production forecast is at the level of 26-29 MMT. Crop conditions in France have deteriorated over the past week, and now only 81% of wheat acreage is rated as “good/excellent”. The European Commission has lowered preliminary expectations for wheat production in the EU to 124.8 MMT, while the IGC still states another production record in the world for the next season.
Markets are under pressure by low demand. CBOT soybean oil hit another record, palm oil has got higher. But the cash market almost flat.The low water level in the Parana River in Argentina is already a concern for Argentine exporters, and the annual dry season is just beginning. Not much rainfall is expected in the forecast for much of south-central Brazil, which is the watershed of the Parana River. As a result, the water level in the Parana River is expected to drop rapidly in the coming months. Officials in Paraguay are already reporting that soybean barges are stuck on the banks of the Paraguay River due to low water levels and the situation is expected to worsen. When a similar situation happened last year on the Parana River, ships in the port of Rosario could not be loaded up to full capacity due to low water levels. At the time, the Argentinean government asked the governments of Brazil and Paraguay to increase the flow at the Itaipu dam in order to raise the water level in the Parana River, which they did. The situation is further complicated by the fact that the contract for the dredging of the canal on the Parana River was expired on April 30, and the Argentine Transport Minister died in a car accident a couple of weeks ago, according to Soybeans and Corn Advisor. According to market participants, April soybean exports from Brazil exceeded 17MMТ. Even it was lower, it’s a lot of beans.
At least 6 vessels of Brazilian soybeans have already been contracted by the US, Brazilian traders and analysts say. Soybean premiums in Brazil are falling again. Traders talk about requests for washouts on Chinese shipments for June and July from Brazil. A very poor crush margin may be the reason.
Sunflower in Russia has been sown on an area of 0.8 million hectares, or 9.6% of the planned, and it is still difficult to predict production. In Ukraine, 2.2 million hectares, or 35% of the planned area. The lag behind the traditional sowing schedule is significant, but this is not yet critical. The forecast for production still remains at 15.2-16.2MMТ.
CBOT’s soybean-to-corn ratio fell to 2.35, suggesting an overvalued corn or undervalued soybean. A similar situation was observed in 2019 when the flood reduced the area under corn and encouraged farmers to sow it more intensively.
As a result, someone calls all of these new supercycles, another one – Chinese edition of Great Grain Robbery. But the market knows better. May it May.