We must watch seven areas of major, long-term change for the grain sector due to the pandemic of COVID-19, to understand how production and consumption are scaling back across the globe.
Whereas some changes are yet to be assessed, others are at the order of the day and their influence cannot be underestimated.
Among them:
1) increased government intervention;
2) changes in consumer behaviour;
3) increased food security concerns.
Following most basic human instincts, consumers tend to resort to hoarding in the uncertain times of the pandemic, which may cause shortages.
This year we have witnessed grain importing countries stepping in to counter panic-buying, protect local consumers and to guarantee the continuity of supply by building up inventories in order to keep at bay food security concerns caused by the pandemic of COVID-19.
For their part, the governments of the producing countries have either pondered or, ultimately, resorted to export restrictive measures in order to limit price increase of the basic food commodities in their respective countries, like for exemple the imposition of the Russian export quota and tax.
These grain export restrictive measures hang over the market like the sword of Damocles, making the Russian availability in the export markets more of an unknown.
As a matter of fact, Russia has a history of disrupting the wheat market by implementing restrictions or duties.
The difference is that today Russia has come to lead global exports in wheat.
Official Russian crop numbers see that Russia harvested a grand 85.9 million tons of wheat.
However, what’s important to know at this point, are the actual Russian wheat exports and their timing.
Up until recently, most analysts pegged Russian exports close to 40 million tons.
However, Soviet Ag in the light of today’s situation, slashed this number being questioned it those wheat export estimated at 40,8 million tons and indicating that will stop to 36,3 million tons, betting on farmers to postpone the sales.
Speculations as to the consequences of the implementation of restrictive export measures by Russia give rise to rumours.
Consequently, as the in famous trading saying says: buy the rumour, sell the fact.
As of late, indeed, we have seen a flurry of buying spree: Egypt, Tunisia, Bangladesh, Thailand, Yemen – all tendering to buy wheat.
Private importers have also been busy.
This comes on top of robust grain demand from China.
In the meantime, prior to the enforcement of the announced export tax as from February 15, 2021, Russian customs authorities have started checking export shipments (a procedure which might take up to 10 days!).
These inspections, thus, are slowing down exports.
In add, Logistics in Russian ports in the winter is usually no picnic.
And this year it is no different.
There is currently a severe shortage of river-sea type fleet on the Azov freight market.
How does it all reflect on wheat prices today?
Building pressure on the Russian FOB prices spot positions.
Building pressure on Russian CPT prices with limited farmer selling (for the moment, at least).
Imminent spike in all CIF prices.
Generally, it is fundamentals, such as supply chain glitches paired with robust demand, which drive up the heat in the grain markets.
And technical/algorithmic driving forces of trading take it over from there.
However, this year it does not equal lacklustre trading and so, we have seen the cameback of a historic financial instrument: the futures.
Grain futures and options contracts are no longer primarily used by farmers, traders and processors to hedge their risks.
Their practical use of a hedging instrument for offsetting the positions in the physical market has been dwarfed by huge positions of speculative financial entities, who now dominate in commodity contract transactions.
We now have a situation, where the interconnectedness of the financial and agricultural markets is uncontested and pervasive.
Agricultural contracts are bundled with non-agricultural contracts into commodity index funds contracts.
So, it is the fund formula, rather than supply and demand fundamentals, that drive prices.
However, it is doubtful as to whether there will be many traders willing to sell the wheat ahead of Russian farmers’ return to the market, not knowing what prices farmers will be willing to accept when they are back in the game.
