Rural Voice Market Commentary – January 13, 2020
by: Scott Krakar
The inflation trade that began towards the end of 2020 continued into the new year. Most asset classes continue to inflate, and many liken this to the roaring 20’s of the past century. One notable market commentator wrote that “we are seeing the longest list of inflation forces in 50 years.” Housing prices, oil prices, metal prices and most notably grain prices are all rallying in price. In the case of grain prices, values are rising to levels not seen for many years. The inflation trade is positive to grain valuations and this has helped to fuel the money flow that is accelerating the upside momentum. Many money managers look to own a basket of commodities in inflationary periods and this passive investment is happening now. The case for higher grain prices has been more than this, however, because there are regions of the world that grain production is being severely challenged due to drought.
It is noteworthy that this is all occurring as Covid infection rates continue to surge around the region and abroad. Here in Ontario we have seen further restrictions and the state of emergency declaration reintroduced; with the purpose of limiting travel. As discussed, in the midst of this, markets are surging with hopes that the vaccine roll out will be rapid and effective. Government authorities voice confidence in this rapid roll out, and the market action tells us through market forces – that many people agree likewise.
Of all the grain markets, the soybean complex has been notably strong, with astounding pricing developing, especially in old crop markets. As we have been discussing, China demand is huge as the nation rebuilds its swine herd, and to do this they need soys. Brazil having become sold out of supplies, China came to the US for stocks and has been buying large volumes continually. As the US ships these beans, US ending stocks have been drawn lower and lower – and from this, prices have moved to ration supply until South American production becomes available. This has been the situation for some time, and it is from these events that soy prices have been strong since harvest. While the old crop narrative has continued in this manner the variable input has been South American weather and the fears concerning current production in this important region. The soy crop in Argentina can’t seem to catch a break as rains continue to be elusive in the country. Soybeans are in ration mode and where prices go from here are to levels that prevent folks from buying beans because they are too expensive. If Argentine weather remains threatening prices must continue to ration. How high the market goes is dependent on increasingly important rain in the region. Everyday that goes by we see more and more worries about what final yields will be in the country. Why all this focus on Argentina today? This country is the largest exporter of soymeal in the world. And finally when do the steep price increases stop? It is of course when crop fears in Argentina subside, potentially even with one expansive rainfall. Weather markets are known to be brutal for their severe and rapid price movements. I’ve grown beans for enough years to recognize that some of my best crops come in years when the crop experiences early dryness followed by good rains. Will this happen in Argentina this year? How good are you at predicting the weather?
South America is all the worry in the corn market too. As the world balance sheets tighten US exports fill the gap until Brazilian and Argentine supplies come available. But what happens if these southern hemisphere countries see mounting crop losses? It’s a long time until the US will produce another corn crop. If the Argentine crop and the second crop corn in Brazil have issues then corn futures will run higher to ration corn, like is happening with beans. Couple this with the USDA January report showing a historic reduction in US corn production last season (from previous reports) and expectations of continued demand. This all leads to a bullish market. With this in mind it is little wonder that corn ran limit up on USDA report day Jan 12th.
The wheat market also continues to trade higher along with the soy/corn markets. Questions remain about the crop conditions in many areas including the Hard Red winter plains in the US and in Russia. Russia continues to keep the market nervous as they continue to chatter about their export tax, and potentially further increases to this tax. This is significant as Russia has become the largest exporter of wheat in the world in recent years – and has been the cheap seller. To highlight the ramifications of this, Egypt, the worlds largest wheat buyer – tendered for wheat about the time of the release of further export taxation from Russia. The tender received offers that were up $30/metric tonne compared to their tender only one month before. In this tender they received only 4 offers, and due to the prices and limited offers they cancelled the tender. In recent years Russia has been the dominant shipper to Egypt and other major buyers in the world. With crop problems there, buyers will come looking to the US once again.