Soy and corn around USD 600 and USD 300. How far can they go?
Global uncertainty and volatility do not escape the global agricultural commodity markets. At the national level, the progress of the crop has been seen on the entry of trucks, although there is still a long way to go.
At this point in 2020, the world looked disoriented at the price of oil futures in negative territory. Twelve months later, many of the agricultural and non-agricultural commodities, such as metals, exceeded or are close to their highest prices in history. In the case of SB, is traded above USD 600/ t on the Chicago Market for the first time since 2012. Although the rise seems to have no limits, what are the latent risks that could put an end to this bullish rally?
First projections for 2021/22 US offer by the USDA
One of the main limitations comes from the production side. On Wednesday, a new report on the World Supply and Demand for Agricultural Products (WASDE) was published, prepared by the United States Department of Agriculture (USDA), with the first forecasts of what the 2021/22 American heavy season may bring, already in full swing.
This report highlights an expectation of significant production increases in the United States for both maize and SB. Harvests for the US 2021/22 season are projected higher for these two crops, with SB production increasing by 6.5% and corn by 5.7%.
Despite the low stocks of the North American powerhouse, the improvement in maize harvests far exceeds this low storage, and a supply greater than the one of the previous year is expected in this new season. With this, at the end of the new cycle, the inventory level should rise more than 20% up to 38.3 Mt.
On the part of SB, a slight drop in total supply is expected, but it is not ruled out that an improvement in yields could end up twisting the historic drop in stocks, which passed 14.3 Mt in the 2019/20 campaign at a projection of just 3.3 Mt when the current 2020/21 cycle ends. For 2021/22, the level of inventories at the end of the season would rebound slightly to 3.8 Mt.
Uncertainty in global financial markets and the role of the FED
On the other hand, the US consumer price index showed higher than expected increases, with a year-on-year rise of 4.6% in April, the highest level in almost 12 years. This highlights some degree of unleashing of inflationary pressures. A rise in prices in the United States weakens the competitiveness of the dollar and devalues the real gains that may be generated in the North American markets, including those of the Chicago market.
At the same time, vaccination in the United States is progressing at a really good pace. With 265 million doses applied so far, about 47% of the population is vaccinated with at least one dose. Not satisfied with this, by US Independence Day, July 4, it is expected to have 70% of the adult population vaccinated with at least one dose, which gives hope for a faster economic recovery.
If the US economy returns to a path of sustained economic growth, accompanied by the acceleration of the price index, the loose monetary policy and the low rates of the Federal Reserve would be limited. Potential increases in the interest rate of the FED would lead investment funds to greater investments in sovereign assets. If taking positions in the commodity markets loses preponderance, prices could potentially be limited or down.
Not satisfied with this, in views of reaching historical price records, the bullish bets of investment funds in commodities could be limited. Beyond the potential increases in global interest rates, investors could consider that commodity prices have reached their maximum level and will not provide them with the future performance they seek, which could lead to a generalized closure of positions that pressure prices down.
China, the engine of global demand
Thinking about two factors that can influence maize and SB prices in the long term, we first find the evolution of demand from the People’s Republic of China. Although the global stocks of maize and SB would show increases in this new season, the level of stocks in China in both maize and SB seems to continue declining. In this context, no public data is showing the evolution of stocks, but the downward trend that was published could continue to drive prices. The other unknown remains concerning production within China itself, which would limit exports and prices if there is an improvement in harvests.
The world after COVID
Finally, much has been discussed about the resilience of global value chains. With this new stage of globalization, the last 30 years have deepened a sustained process of relocation of company operations, forming value chains that stand out for their efficiency. However, this chains have found a weight enemy with the bunch of outbreaks of the coronavirus. In this framework, it should not be forgotten that the food security of the countries may have more relevance in the coming times, seeking to build more strategic and resilient global value chains, putting efficiency on another level. Potential protectionist policies in line with these objectives and productive impulses within the countries themselves can limit the trade in grains, and consequently their prices.
At the local level threshing shows delays, but July and August could bring a record entry of maize to the plants.
The droughts of September and October of last year determined that part of the lots that planned to be planted with first-class maize could not complete the implantation on time, deciding to take the short-cycle varieties. Accordingly, the threshing progresses with delays compared to the last campaigns. According to information from MAGyP as of May 13th, the harvest has advanced over 36% of the target area, behind both the 40% registered for the same height last year and the 41% average of the last 5 seasons. This progress is thus the lowest mark since the 2015/16 season when by the first week of May only 25% of the total area had been harvested.
However, it must be taken into consideration that the area to be harvested for commercial grains is, according to the same official source, at its highest level in the records, with 7.75 million hectares; that is, 345,000 ha over the previous year. In this way, the area that remains to be harvested for the next few months is the largest in history, to which are added very good prospects for yields in key areas, such as the province of Córdoba. Thus, a July / August loaded with grain deliveries to ports is envisaged, provided that environmental conditions allow it.
For its part, the SB harvest advanced to 67% of the area in that same week, well behind the 83% of the previous year and even below the 70% average of the last five years. However, it equals the progress percentage of the 2017/18 campaign.
The level of progress of the harvest does not go unnoticed in the entry of trucks to the Gran Rosario metropolitan area. So far this maize campaign, which started in March, almost 230,000 trucks with this crop have already entered, well above the average of the last 5 campaigns, with around 206,000 trucks entered. However, current income is still below the start of the 2019/20 campaign, when there were more than 274,000 trucks with maize at this same point last year.
On the part of SB, a similar situation occurs as with yellow beans. The more than 195,000 trucks with SB that have entered since April 1, which formally began the new 2020/21 campaign to date, far exceed the historical average of 180,000. However, it is also below the previous season, which totaled more than 208,000 trucks for this same period.
The delay in the harvest also impacts the shipment schedule. For May, the scheduled cargo on ships from Gran Rosario terminals for all products totals 2.1 Mt, somewhat below the 2.2 Mt registered on the same date last year. However, the dispatch of flour for the coming weeks stands out, a product for which dispatches of 1.7 Mt are scheduled to date for the next few weeks, above the 1.4 Mt of the previous year. In beans, on the other hand, only 89,000 Mt were recorded, compared to almost 487,000 Mt in the same period last year. On the part of maize, fewer loads are also expected in the month, with a schedule that includes 1.4 Mt of yellow grain, compared to 1.8 Mt in May 2020.
In the local market, prices fall during the week but almost double in the year
After the euphoria and closing at more than USD 600 / t on Wednesday, SB are trading around USD 590 / t, driven lower by profit-taking. Maize, after hitting nearly USD 290 on Wednesday, is trading around USD 280 / t, similar levels to earlier this month of May. Despite the adverse contexts that were mentioned, it should be noted that both crops show a year-on-year increase close to 88% for SB and more than 112% for maize.
A similar panorama can be seen for the slate prices of the Cereal Arbitration Chamber. Maize is also returning to levels at the beginning of the month, trading above $ 220 after approaching $ 245 last week. For its part, soy is trading around USD 345, having surpassed USD 362 this week in line with the euphoria in world markets. As in Chicago, significant year-on-year increases can be observed, of more than 59% for SB and close to 85% in the case of maize.
Source: https://bcr.com.ar/
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