Crop shortage more urgent than other market factors

Crop markets might have followed the cue from other commodity trade last week and took profits after the strong rally this winter.

Crop markets can’t ignore wider market sentiments, but I think the supply fundamentals of oilseeds and feed grains are more urgent and less dependent on COVID recovery than other commodities.

Daily market commentary noted rain was improving prospects for United States winter wheat and Argentina soybeans, but the main reason for last week’s market pullback was a momentary reassessment of the optimism in commodity markets, particularly oil markets, which up to that point had concentrated on the economic boost flowing from the vaccine rollout, the lifting of COVID restrictions and the passage of the US$1.9 trillion COVID relief package.

But the higher a market gets, the more nervous traders become.

There is a race between the pace of vaccinations and the spread of the more virulent COVID variants.

Vaccinations in Europe slowed last week while health authorities rechecked the safety of the AstraZeneca vaccine, even as the number of COVID infections rose as the B.1.1.7 variant, which is more contagious, became the dominant form of the disease.

France reimposed lockdowns in some areas, showing that the world is not yet out of the woods.

Full freedom of movement and the resulting increased demand for petroleum fuel might prove elusive for months, casting a cloud over the oil bull’s parade.

That can’t be ignored but I also think there is a difference between the fundamentals of the oil and grains markets.

Oil’s price level has a degree of artificiality because the Organization of Petroleum Exporting Countries along with Russia and a few other exporters, collectively known as OPEC+, have agreed to limit output.

But the agreement is tenuous and could fall apart, unleashing pent-up oil upon the market.

But in the current agriculture picture, there is no country holding back millions of tonnes of oilseeds, corn or wheat.

Those with exportable surpluses are shipping them out as fast as they can to meet the global demand.

Even as futures markets stumbled last week, China bought another 3.9 million tonnes of American corn, bringing the total amount of 2020-21 U.S. corn going to the Asian giant to 23.2 million tonnes, an amount that would have seemed beyond belief only six months ago.

Repeatedly this crop year, the U.S. Department of Agriculture has been forced to cut its forecast for year-end domestic corn stocks. In August, just before harvest, it expected an ample 70 million tonnes, but by December that was down to 43.2 million tonnes as it became clear the crop was smaller than expected and export demand was picking up.

The March report pegs stocks down at 38.15 million tonnes and it takes little imagination to see that falling further, given signs China is still suffering feed shortages even as it continues to struggle to control African swine fever.

Last week China’s government sent a document to animal feed producers and others, outlining a plan for nutrition experts to draw up guidelines by the end of this month on ways corn and soymeal could be replaced by alternative grains.

It did not seem to have much success with similar plans two years ago at the height of its trade war with the U.S. It shifted suppliers but still used huge amounts of the oilseed.

This year, with corn supply in China tight, its feeders  are turning to wheat. The USDA forecasts China will feed 35 million tonnes of wheat, up from 19 million tonnes last year.

Reuters analyst Karen Braun notes that for the first time in eight years, China’s wheat stocks at the end of 2020-21 are forecast to be less than they were the previous year.

Officially, its wheat stocks remain huge at about 150 million tonnes, or more than a year’s worth of supply, but still it is surprising that the country is diving into its wheat supply, which it sees as critical to its food security.

I’ve focused on feed grains here, but much has also been written about the tightness in global oilseed supplies.

It is obvious the size of coming Northern Hemisphere crops will be critical to whether the shortages continue.

The storms in the U.S. that brought heavy snow to the eastern Rockies and tornado warnings to the South delivered welcome rain. The Midwest is going into seeding season with good soil moisture but much of the Canadian Prairies and North Dakota are dry.

The mean of long range seasonal forecast models show a tendency toward dry, warm weather across the U.S. Plains, Midwest and the Canadian Prairies into July.

That could mean a quick seeding season but also stress on seedlings and upward pressure on crop futures prices.

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