Grain and oilseeds market resumed price rally last week.
Fundamentals were unchanged so, as we advance, the key drivers will be the South American exports’ size and speed, the fight for acreage between corn and soybeans, and the total pace and extent of demand from China that are drowing down domestic US stocks.
In add, if the USD were to again continue weakening, there are chances that commodity continuesto see index funds buying as a hedge against weaker USD value.
The Chinese government on Friday sold nearly 2.2 million tonnes of wheat from its state stocks on its domestic market to meet demand from its national industry.
US headline flash sales had 5.9Mt of Chinese specific corn sales (plus 200,000 unknown) in the last week alone and many are expecting some more business today.
USA sold also 132 000 t of soybean of the next crop to China.
But, how big will the US export program be? With the amount of business on the books, ideas are being pushed up around the market.
However, there’s plenty of uncertainty about how that will work in the already tightening balance sheet.
Friday’s Commitment of Traders reports had continued reductions in the short / increased length on the fund side for corn, but as always those are only dated as of Tuesday.
With the moves later in the week (and particularly Friday) they’re entirely out of date and we’re almost certain to be pushing new record lengths.
Previous weeks’ drops in price may have made the situation worse and likely uncovered some more demand.
Indeed, given the supply and demand picture, at this moment, any pullback in prices could be seen as an opportunity to add a trade.
That will make this coming Friday’s update extremely interesting.
Meanwhile, wheat prices are soaring week on week, as different factors are incaming.
Russia’s export tax story continues to drag on, with discussion over the weekend about the expected new crop tax formula, which was discussed heavily at a grain union meeting there on Friday.
News reports are calling it a 70pc tax over a $200/t FOB threshold, which would result in significant taxes in the mid $200-and-up range.
But, there’s still some uncertainty as to the details; how exactly the benchmarks will be set and, given the lags in timing, whether it is going to be fully hedgeable by exporters.
There’s also a rumour that the thresholds and rates may see revision in May each year, which would open a large can of worms for new crop forward sales.
However, we believe that all this is unlikely as Russia may want continue to be a reliable supplier to the world market.
In the meantime, indeed, Russian exporters are rushing to get as much wheat out as possible before the introduction of export taxes on 15 February.
In January, at least 3.3Mt of wheat have been exported.
This rate is 57% higher than the activity recorded in January 2020 but more importantly, it is higher than Russian operators had anticipated.
There are still major questions about the volume of wheat that Russians will export.
While wheat prices should again move higher principally as the corn values continue to climb due to its fundamentals.
Corn price broked new highs this week, reversing all the last week’s drop.
The pullback in corn had been not caused by a fundamental change in the supply and demand balance sheet but mainly due to the funds’ extreme one-sided positions, which went for a quick exit once the market prices started declining.
US Corn is still competitive in the world export market and the US likely estimated carryout would continue to reduce, as the export sales continue to outpace the estimated demand by US Ag.
So, maybe prices to push higher in the coming weeks as the corn and soybeans will have to trade higher to increase demand rationing.
Probably that these fundamentals could potentially push corn prices to the $6 bu mark in the coming months.
This bullish makeup of the corn balance sheet in new crop would mean that now soybean prices will have to stay at elevated levels and move higher if soybeans are to see much-needed expanded acreage.
The Fundamental situation in soybeans continues to be supportive, and we struggle to see how the tight carry out will be solved without significant demand rationing.
May lower prices would only attract further demand to oilseeds making the situation worse.
Given the current supply and demand outlook for soybeans, maybe, soybeans could breach past the previous highs made a couple of weeks ago.
On a weather point of view, recent rains in Brazil are suggesting possible damages and delays in some regions as harvests are progressing, even if the recent forecasts for South America are a bit drier, which would allow farmers to pick up the harvesting pace a litle.
Black Sea new crop optimism is gradually building with fairly little significant damage/winter kill discovered to date.
The region is a bit over a month away from breaking dormancy, depending on the weather, and will start attracting more detailed attention there as spring approaches.
In the absence of large export pressure from the Black sea origin, US wheat could remains competitive into the world export destinations.
At current prices, even the higher protein US wheat, which usually trades at a premium vs. low protein wheat, is currently trading well below the lower protein wheat.
The USDA’s next WASDE report is out next Tuesday, and after the flash sales program in corn there are many questions about how big a cut to stocks the USDA will have to make.
The normal bias is that they’ll tend to “smooth” the shifts a little, accounting for feed and residual adjustments and the like.
However, given the volumes in recent weeks there are more ideas about the possibility for another large cut this time around.
It promises to be a week full of surprises. We’ll see.
