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Sunday Scaries: What I'm Watching This Week In The Grain Markets

Barchart - Sun Sep 24, 7:58AM CDT

So many times, we like to think the fundamental factors influencing grain prices are as simple as whatever is happening with domestic supply and demand. And while maybe as recently as 10 years ago that was the major driver in price, grains are now a part of a global market with all the intricacies that come with being a part of a global market.

Gone are the days where worries over US soybean yields were the only focus. Now to get an accurate feel on what soybean demand could look like, you also need to have a grasp on China’s property market and reserve rate requirements. The butterfly effect in grains these days, where a country banning the exports of a niche commodity can spill over into increased demand of another, is both amazing and terrifying.

Each week I pause and think about what is happening around the world. I like to take into consideration not only what we’re seeing but what I think could happen in the coming weeks and what that could mean not only for futures but also for spreads and local basis.

We have no shortage of things happening around the world that I am watching this week, with the situation between Russia and Ukraine capturing a great amount of my attention.

In addition to Ukraine ramping up their attacks on Russia’s Black Sea naval fleet and other targets both in Crimea and on Russian soil, Ukraine’s shipping corridor seems to be working for now. We have seen a couple of small ships successfully travel the route loaded with wheat; with more ships scheduled to arrive in the next few days. While small loads of wheat making their way out of shuttered Odesa ports is a great sign of progress, it is the rumors that China has bought 4 panamax loads of corn for shipment in October that has the bulk of trader attention around the world.  

While the lack of a viable shipping corridor was costly for Ukrainian farmers trying to move wheat at harvest time, the bulk of old crop corn had been shipped earlier in the year. Storage space in the country is full, with the same to be said for Ukraine’s EU neighbors, making a solution ahead of harvest vital. A functioning corridor is necessary not only to help ease pressure on corn prices in the region, but to also better supply world demand.

Russia’s reaction to a fully functioning corridor will be interesting to see. A viable shipping corridor for Ukraine that Russia has not signed off on takes away a major bargaining chip Russia had with the Black Sea Grain Initiative. However, with China the rumored buyer of these larger cargoes, it may prove difficult for Russia to disrupt the flow without risking a blow to relations between the two countries.

As mentioned, we have also seen an increase in Ukraine’s desire and ability to attack important Russian targets in Crimea, the Black Sea and on Russian soil. We saw a second attack on Sevastopol in as many weeks this week. While so far it appears Russia’s navy is the target of these attacks, the risk remains high we could see an incident with a merchant ship or Russian port.

Russia is the world’s largest wheat exporter, with the USDA estimating they will ship 49 million metric tons of wheat this year, or nearly 1 million metric tons of wheat a week. That type of shipping pace needs to happen without disruption, something that is highly unlikely in the current geopolitical environment.

For now, though, global wheat supplies remain plentiful, with or without Russian offers as seen in this week’s physical transactions—but anything that could disrupt the world’s ability to tap into those supplies could prove explosive and bears watching.

In addition to what is happening in the Black Sea, I am watching the global economy, with a focus on China. Chinese consumers are heading into their weeklong holiday this week and are expected to spend money in a big way. We are starting to see some signs that consumer confidence is on the rise, or at the very least Chinese consumers are looking to travel and spend more on dining.

The situation in the country’s property sector remains well above my paygrade, but concerning, with experts saying it is likely to get worse before it gets better.

China’s domestic grain and oilseed market moves have been interesting as of late, with what had been red hot meal demand at ports over the summer cooling off considerably over the last month. Dalian meal prices saw an epic run, trading higher nearly every week from May into September, before falling off over the last couple of weeks. Purchases at ports had been averaging hundreds of thousands of tons throughout the summer with buyers covering nearby and deferred needs. Levels are now hovering around 10-20% of what we were seeing, with many of the purchases made for the nearby timeframe.

Chinese buyers have reportedly gone quiet in both Brazil and the US lately for corn and beans as well, something that is surprising with their holiday coming up. Prices remain elevated in the country, though prices have fallen off significantly from recent highs. Overall production expectations continue to vary after a growing season marked by drought in some areas and heavy rain in others. There are rumors of major Chinese demand lurking, but so far freight and basis do not say that is taking place.

We can’t talk about world demand and US business without mentioning currency and what is happening from an economic standpoint here as well. I can’t help but feel as though recent calls we are going to see a soft landing could prove to be a bit premature.

I believe many consumers and businesses have found themselves able to weather the first leg of higher interest rates by eroding margins on the business side and by tapping into credit or stretching budgets on the personal side. Many will find themselves unable to withstand another several months to a year of this—though I fully expect the analysts and experts who have been calling for a Fed pivot over the last year to continue to do so. This helping to keep the hope alive we will soon see the return of reduced rates and free flowing money--even if Powell is direct in saying that is unlikely to happen.

Higher interest rates are impacting cash grain values and demand around the world as well. The increase in the cost of money has weakened basis, widened carries and has also made world buyers go more hand to mouth. The increase in storage costs and the idea supplies have returned to a solid pre-covid baseline around the world, has allowed end users to feel comfortable again with buying as needed.

This is just a glimpse of what I will be watching this week, with a slew of other interesting developments likely to catch trader’s attention, some of those are:

·         South American weather. Be aware there are some important differences in historical performance of weather models in Brazil, with the GFS sometimes struggling with temperature and rainfall outlooks. Eric Snodgrass, a well followed meteorologist was kind enough to share a very helpful link of important weather models for the region. It does appear as though rain will start falling next week, with the million dollar question being whether it’s the actual start to monsoonal flow.

·         Mississippi River levels. With harvest looking to ramp up, ease of grain flow is vital. With river levels already incredibly low and tows reduced, disruptions are nearly guaranteed, with freight costs starting to rise. This will limit our competitiveness at a time when we should be seeing big sales and shipments of soybeans taking place.

·         Quarterly Stocks report at the end of the week. This will give us the final carryout for old crop corn and soybeans and help reconcile wheat production estimates. The September report tends to have little in the way of surprises but remains important to watch as it directly carries over into new crop beginning stocks.

In the end, there are a ton of moving pieces when it comes to what is influencing price direction. We are likely to remain range bound in the short term as the number of unknowns continues to outnumber the number of knowns. A lack of certainty will keep us supported but likely limit rallies until traders feel more comfortable with direction.

As always let me know if you have any questions. Have a great week!

More Grain News from Barchart
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.