It seems markets have got into a funk worrying about the potential for a recession and are betting that demand for commodities, including crops, will be restrained.
Crop markets have also replaced the panic caused by Russia invading Ukraine with a more calm assessment. Prices for most major crops have returned to levels similar to what they were before the invasion.
The potential for recession has been a newsworthy topic for more than a year as central banks battled inflation by raising interest rates. Nevertheless, economies around the world have been surprisingly resilient.
Read Also
Critical growing season is ahead for soybeans
What the weather turns out to be in the United States is going to have a significant impact on Canadian producers’ prices
In the first quarter, the gross domestic product of the United States was still up 1.1 percent, year over year. The European Union was up 1.3 percent and Canada did a little better, growing 2.5 percent.
Unemployment levels remain near record lows.
But the latest monthly readings show GDP growth in all three had slowed to a near standstill.
As economic growth slowed, so too has inflation. But at 4.3 percent in Canada in March and five percent in the U.S., readings are still higher than the central banks’ target of two percent.
As inflation cools, the central banks say they probably will not make further interest rate increases this summer, but will monitor the effect current rates have. However, no banks are talking about cutting rates, which are the highest in decades.
So monetary policy is acting as a brake on the economy and on demand. At the same time, our economic vehicles face dangerous potholes, such as problems in the U.S. banking system and the battle in Washington over extending America’s debt ceiling.
Some hoped a resurgent economy in China would help offset the slowdown in the West.
China ended its strict COVID restrictions only a few months ago and some thought a lot of pent-up demand would be let loose. It’s partly true. Consumers are travelling and spending more, but China’s manufacturing sector is sluggish.
So there are lots of reasons to believe that economic troubles will lead to a recession that saps demand for commodities.
This view is perhaps most obvious in the crude oil market.
At the start of April, the Organization of Petroleum Exporting Countries and its allies, known as OPEC+, announced production cuts causing the futures price of West Texas Intermediate crude to jump up to more than US$83 a barrel.
But later in April and into May, as recession and weak demand worries regained prominence, crude crashed back, trading below $70 last week.
U.S. freight companies and refiners says the economic slowdown is already reducing demand for diesel fuel.
Are the same forces at work in crop markets? In April, crop futures markets did fall.
Chicago soft wheat fell 10.3 percent on the month, hard spring wheat dropped almost 10 percent, corn fell more than eight percent and soybeans about five percent. The canola futures market fell 7.4 percent.
You could argue that demand problems are behind the decline.
Export demand for U.S. corn in recent weeks has been dismal as China cancelled orders, opting instead for cheaper Brazilian corn.
U.S. wheat exports are also poor.
Russia still has lots of cheap wheat and has a brisk export program. Canada and Australia have also had strong wheat exports.
But U.S. crop commodity markets focus a lot on how American exports are faring.
The demand factor is one part of the puzzle, but you could also argue that the risk premium that was priced into the crop market when Russia invaded Ukraine has now dissipated.
Corn, soybean, hard red winter and hard red spring wheat crop futures prices are all now close to what they were in January 2022, just before the invasion.
Soft red winter wheat, however, is weaker with a Chicago futures price near the level of early 2021.
There are a few reasons why soft wheat is lagging.
The U.S. Department of Agriculture forecasts soft red stocks by the end of the crop year will be a little higher than last year, while stocks of hard red winter and hard red spring will be lower than last year.
Soil moisture in areas where U.S. soft wheat is growing is good, compared to the drought that has plagued hard red winter.
Europe’s soft wheat is also generally in good shape.
But all wheat futures markets stopped falling last week on jitters about the continuation of the Black Sea grain export deal and on new data about the U.S. hard red winter wheat crop.
An Oklahoma State University tour projected last week that the wheat crop there would reach only 54.3 million bushels, down from 68.6 million last year and 115 million two years ago. Oklahoma normally is the number two red winter wheat state. Kansas is number one and its yield tour runs May 15-18.
