The intensifying war in Ukraine and the rising value of the American dollar are two major factors driving crop markets as we enter fall.
Wheat futures jumped higher last week as the Ukrainian counter offensive made strong gains against the Russian invaders, prompting Vladimir Putin to call up more fighters and rattle the nuclear threat.
This raised fears that Russia might break the tenuous agreement allowing Ukraine to export grain by sea.
These tensions and Russia’s cutting off of oil and gas exports to Europe weighed heavily on European currencies.
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The euro-U.S. dollar exchange rate fell to the lowest level in 20 years as the American buck soared against most world currencies following the decision by the Federal Reserve to hike the benchmark interest rate by 75 basis points to 3.25 percent in a bid to cool surging inflation.
The strong interest rate, an economy doing better than many others and the “safe haven” perception of the United States are all contributing to the rising American dollar.
The Canadian dollar fell to near US74 cents, its lowest level in two years, even though the Bank of Canada is matching the U.S. Federal Reserve on interest rates.
But the loonie’s decline is modest compared to other currencies.
As of Sept. 23, the loonie is down only about one percent since Jan. 1, while the British pound is down 10 percent, the euro is down about 7.5 percent, the Japanese yen is down more than 14 percent and the Australian dollar is down five percent.
The Brazilian real is up 6.5 percent against the U.S. buck since the start of the year, but to do that and rein in its high inflation the central bank there has the benchmark interest rate at a whopping 13.75 percent.
As the American dollar climbs, U.S. farmers worry that it will make their crops appear expensive to foreign buyers, causing them to turn to supplies from other exporters.
The pace of American grain exports in recent weeks has been slow, and the strong dollar might be an impediment, but another factor is that current U.S. supplies are tight because the harvest there has only just begun.
The trade is also concerned that as central banks in countries around the world raise interest rates to battle inflation, which is a global problem, they will slow economies so much that they will fall into recession.
Recessions tend to weaken demand for most things, including crops, leading to slower exports and domestic demand, which keeps a lid on crop prices.
But on the other hand, with global grain supplies far from abundant and, in particular, U.S. grain stocks quite tight, the potential for a crop price melt down is remote.
Global crop supply, at least for wheat, became more comfortable with the latest private forecasts about Russia’s crop.
Even as the spectre of increased conflict in Ukraine raised worries about that country’s ability to export crops, analysts said all signs point to a gigantic wheat harvest in Russia.
SovEcon forecast the combined winter and spring wheat crops would reach 100 million tonnes, well above the previous record high of 86 million tonnes produced in 2020. Another forecaster, IKAR, put the crop at 99 million tonnes.
SovEcon expected a large crop, with a previous forecast of 97.4 million tonnes, but the spring wheat crop proved even better than expected. Spring wheat, grown mostly in areas further east than the winter wheat crop, typically makes up 30 percent of Russia’s crop.
This year’s bumper harvest follows what was a disappointing crop last year when only 75 million tonnes were produced.
But Russia’s ability to increase exports this year might be limited.
It has a tax on wheat exports. Also, some banks and insurers won’t deal with Russia because of its aggression against Ukraine.
International sanctions against Russia are not levied against food exports, but some countries and institutions won’t do business with it.
SovEcon expects Russia will export 36.5 million tonnes of wheat this crop year. That is more pessimistic than the U.S. Department of Agriculture, which forecasts Russia’s wheat exports at 42 million tonnes.
If SovEcon is correct in its production and export predictions, it will mean Russia will have a problem finding room to store all its wheat.
While time will tell how much wheat Russia exports, there is no doubt Argentina’s supply will be down when it starts harvest in a few weeks.
The Rosario Grain Exchange there said drought had lowered its wheat forecast to 16.5 million tonnes from the previous forecast of 17.7 million. Last year it produced 22.5 million tonnes.
The drought is delaying the start of the corn seeding campaign in Argentina.
