Market Information

For much of this year, many commodities have experienced stronger, bullish markets.  Energy prices remain notably strong, with the geopolitical conflicts in major oil regions of the world still on going.  Despite the often spoken rhetoric, no resolution to these disputes seems yet to be apparent.  While the oil market’s effect is where the media attention is focused, these conflicts have also brought other challenges to the agricultural space, over and above the high cost of fuel.  We have discussed how the Middle East is a big shipper of fertilizers – especially Nitrogen and Sulfur.  We have also considered how much of the world depends on grain from the Black sea area, with Russia and Ukraine shipping around 25% of the world’s wheat exports.  The grain markets have been supported through these ongoing events, as the wars have brought concerns over grain shipping and production worries into the future.  These worries are still present and growing as civilian targeted strikes are escalating.  Recently there have been cargo ships that have been attacked and even sank in waters that were not in Ukrainian or Russian territory in the Black Sea, creating more questions as to the sustaining ability to ship from the region.  With none of these catalysts, that have supported grain markets, yet to be solved, what has occurred with grain pricing?  In the case of corn and wheat, they are both well off their highs and have continued trading sharply lower.

Why did the grain markets show so much concern at the outset of the escalation of these conflicts, but now is showing less unease, with prices sliding.. all the while there are continuing attacks and navigation limitations… along with high fuel prices?   One would expect that prices would remain high, or even continue to go higher, until the disputes were resolved.  How can this be explained?

It has been said that markets do not like uncertainty.  When something is indefinite or unclear, the market tends to react to an extreme, until more clarity comes into the marketplace.  With more information there is more opportunity for analysis.  But at the outset of a market disruption, clarity is very much lacking.  In the case of the ongoing situations mentioned the markets reaction was to push prices higher, as a way to ration a supply crisis, by way of price.  In the case of the recent grain markets strength, prices rallied as managed money funds bought grain futures contracts.  In the case of corn and soybeans, these funds bought record amounts of futures, more than they had previously owned at any time prior.

With the managed money funds already owing record amounts of futures, what would make them want to purchase more, causing the market to rally further?  Well, it would take more bullish news.  Such news could be more demand coming to the US, not just speculated to come, but actual physical shipments.  Or similarly, it could be the lack of shipment from the afflicted areas, in which the physical grain that needed to move, couldn’t, leaving the buyer searching for alternative origins.

This brings us to today’s marketplace and what do we see?  It is reported that product is shipping from the Middle East, through the Strait of Hormuz, albeit reduced, but yet some is shipping.  The situation, while not good, is allowing some product to flow and the market has found an equilibrium currently at today’s prices.  It is similar with grain.  And while Black Sea transits are in jeopardy, there is still product movement.  There is also grain moving by rail to EU ports, both from Ukraine and from Russia and then loading ships for furtherance into the marketplace.    There has been proposals set forth from some EU members to ban EU ports from transiting Russian grain, however at this time there is no disruption.  Despite the fears, product is still flowing from conflict regions.

At the same time, the US and Canadian harvest period is in full swing.  As a result, our supplies are readily available and we need markets to buy our crops.  When they look at US prices, they see product that is very expensive versus other world origins, they see a strong US dollar making products purchased in US dollars more expensive, and we see crop production estimates moving higher, with greater supply.  In the October USDA crop production report both yields and ending stocks for corn were moved substantially higher.  US wheat and soy yield estimates were moved higher likewise.

At the outset we asked why is the market moving lower?  The takeaway message is that the market at its peak, was trading the headline risk, trying to ration demand until more certainty was known.  The market focus has now shifted, we know we have supply – now the grain market needs to find buyers.