Cefetra Market Report:
After more than a year of the grains and oilseeds markets trading almost exclusively on the external influences of Black Sea politics, energy, and macroeconomics such as foreign exchange rates, interest and inflation, the focus has now swung firmly back to the commodities’ own Supply & Demand.
The main reason for this is the success of the “humanitarian corridor” for safe transit of Ukrainian and Russian goods out of the war zone to reach free access to international markets. At the start of hostilities, it was reasonable to assume that millions of tonnes of food and feed commodities would be stuck at its origin, and hence the rush to buy at eye-wateringly high prices to secure critical supply. In fact, due to a concerted effort by all sides, grain movements have more than kept up with this year’s production. Russia’s exportable surplus is believed to be a massive 40Mmt, but vessels are moving 4Mmt monthly on average, so no problem there, and EU efforts to facilitate rail freight to the interior have also been surprisingly successful.
So, despite the dreadful situation on the ground in Ukraine, and markets finding some logistics issues and extra costs, the desire to keep trade intact has meant much less disruption after all. The risk premium in wheat prices has therefore been steadily eroded to the point where it no longer attracts much attention. Have we normalised the war?
What is in the minds of traders is the large crops harvested around the world. Not only did Russia and the rest of Europe produce high yields in nearly all areas, North America had no issues, and we are now discovering that Australia has harvested it’s second biggest wheat crop ever, despite earlier worries about flood damage.
If Supply is strong, what of demand? Globally the economic slowdown driven by high energy costs and more expensive money has undermined all consumption, but in local markets there have been particular damaging issues. For instance, China’s lifting of Covid lockdowns has taken far longer than we would have hoped, and closer to home Avian flu has slashed the national poultry flock at the same time as the pig herd has been hit hard. Feed compounders supplying the monogastric market have effectively become overbought of wheat, pulses, rape and soyameal with existing purchases, and so are rolling contracts forward, and the prospect of rebuilding the sales book this season is slim.
The UK bio-ethanol producers are also on slowdown at the moment, after a long period when corn has been comfortably cheaper than wheat. In recent seasons this demand (up to a million tonnes of grain annually) has been crucial as the “balancing item” when we have had large crops that were not export-competitive. For this ‘22/’23 campaign, most analysts agree we have a 2Mmt exportable surplus, so without Ensus and Vivergo running at a decent pace we really do need to work hard to avoid taking on a heavy carry-out stock.
You can see why the clear bullish - then bearish - trends have developed, and hopefully you have traded your own position accordingly, but what does the future hold? It seems that with the market coping with the Russia/Ukraine conflict, softer macroeconomics, and no shortages in the commodity S&D’s, prices probably have further to fall. However, there are signs that cheap UK wheat is bringing international buyers to our door. We have got cheap enough to compete with other origins now, and also with other substitutable crops such as maize. It may be that we can dispose of the surplus, but it is almost certainly going to be from the dockside – not into friendly local homes. The merchant that has wide connections and capabilities will be able to work with you to best meet your needs here.
We can also look toward another “weather market” developing in the coming months, with an extending “La Nina” pattern. Most of the world’s growing crops look at least fair, but Argentina, for instance, is already showing signs of stress after a long dry spell that has got analysts scratching away at the likely production for next time. Weather is the greatest unknown, but so obviously fickle that it is unsuitable for inclusion in your medium and long-term business planning.
The other positive right now is the fall in natural gas prices, and that means cheaper fertiliser and to some extent other chemical inputs. As ever it is crucial that you keep close to the bottom line of your gross margin calculations, and not get hung up on the prices of the individual elements. We have seen several opportunities in recent weeks where fertiliser has fallen faster than grain and therefore good margins can still be had.
As ever, we encourage you to maintain a dialogue with your merchant, share information and work together for everyone’s best outcome.
To find out more, please contact the team at Cefetra Grain: