MARKETS:
Monday Check-in
Coarse grain and oilseed prices continue to establish their season range. Wheat prices are settling into their range. Weakening again, the US Dollar is unusually influential.
Summary
- The US Dollar is back on its weaker track, supporting US$ prices and often weighing on non-US$ prices.
- Broadly, a lack of major supply problems means that prices most likely continue to range around a low level.
- Wheat price opportunities are about basis and currency in a ranging market.
- Corn prices’ lows might still be lower, but a weaker US Dollar is a defence.
- Oilseed prices now enter their key range-setting month, but that is unlikely to diminish canola’s relatively high prices.
- The ‘known unknowns’ are China’s grain imports and an intensifying Russia-Ukraine War.
Macro
FX: The US Dollar reverted to its weaker trend last week. The predominant flow remains out of the greenback for now. The high starting point for both the US Dollar, and investors holding US Dollar assets, means the potential pool of sellers is large. Thus, the flow is unlikely to end quickly. For US$ commodity prices, the trend lower is supportive. The currency influence on agri-commodity prices is likely more notable than usual, given the absence of major supply problems.
Energy: Oil price volatility remains modest. The oil futures curve, while flattening somewhat, remains backwardated. That curve inversion makes investors less likely to cut their commodity allocations. That flattening, though, is a watch.
Rates: US interest rates are very likely to fall modestly and slowly. As they have been for some time, despite the US President cajoling the Federal Reserve.
Wheat
Crop
Wheat crop worries are very modest. Only a sliver of world wheat production is on our Watchlist. Australia’s crop worries are likely to recede this week. Argentina remains a ‘watch’. Growers are harvesting northern winter crops at a faster pace. Even in Russia, where a few factors had slowed harvesting. The overall context means that production forecasts are largely stable.
SnD
Stable production estimates mean that the market’s focus is on second-order issues. Trade flows thus dominate the discussion. The issues here are likely largely about timing. Russia’s slow harvest had meant unusually strong demand for EU wheat. And perhaps even contributed to stronger US wheat exports last week. Russia’s wheat will likely soon start to flow faster, smoothing out these anomalies. US trade deals with wheat-importing countries, like Indonesia, potentially create more persistent issues. The US, with its heavy wheat inventories, could displace other exporters into these markets. The outcome is highly uncertain because the trade deals remain light on details. That potential displacement would be one of a handful of examples where the Trade War does more than merely rearrange crop trade.
Markets
Positioning in wheat futures saw some novel developments over the past week. The predominant theme for a while had been investors’ short positions swinging higher and lower. Last week saw several changes. Most notable was another group of investors buying wheat futures. The buyers are, most likely, momentum investors. Long-cycle momentum remains weak, so that buying was likely catalysed by short-cycle momentum. So the buying will not be long-lived. Indeed, chances are, it had already come and gone. So swings in those persistent investor shorts return to the fore.
The View
Season 2025 prices remain very low historically (inflation-adjusted). The low level continues to mitigate further downside. Even more so in the context of an all but neutral supply context. The supply context also suggests there is little upside. So, any rally will be limited. That context means wheat prices will likely continue to zig and zag on second-order issues. The US Dollar’s path is the most active broad influence for now. The greenback got back to trending lower last week. A weaker greenback will both, strengthen the floor under US$ prices, and boost them a little. That impact raises the chances that the season lows for US$ prices are in place. But not for non-US$ prices – a weaker greenback has the opposite impact. There are exceptions to the US Dollar’s broader weakness. Russia’s Ruble is weakening against the greenback, making Russian wheat more competitive. And that presents a challenge for competing exporters, Australia included. Thus, best to have modest ambitions for global prices and take the opportunities that currency and basis moves offer.
Wheat has few obvious event risks that would upset that strategy. One is that the Russia-Ukraine war is now a larger spike risk for wheat. The war had been ‘contained’, lowering the potential for disruption of Black Sea exports. We think the potential for disruption is now a little higher. The US President, belatedly, understands that Vlad the Bad has no interest in peace. So, US military support for Ukraine will resume. The war’s intensity has thus increased, raising the risk of disruption. An example this week was a Russian drone attack on Odessa. Market prices are unlikely to have any premium for such accidents. While more likely, such events still have too low a probability for any premium. But, at the same time, any disruption would see prices spike at least briefly.
Coarse Grain
Crop
Coarse grain markets continue to have several weather worries. For the most part, those worries are still a while away from translating into materially lower crop forecasts. The US corn yield debate continues to swirl. The latest fret is about temperature lows that are too high. Yield forecasts’ centre of gravity has probably declined a little. Partly because the highest yield estimates now seem less likely. Even so, the market consensus is 2-3 bushels (~5½mmt) above the USDA’s 181bu/ac anchor. Importantly, the debate is about whether the US corn crop is huge or somewhat larger than huge. And, it will take a lot of crop damage for supply not to be huge. Right now, there is not enough ‘clear and present danger’ to crops to meet that criterion.
SnD
Coarse grain supply is, consensus, on track to become more neutral. The supply easing is likely still building to its peak. Brazil’s second-crop corn has been slow to come to market. That has kept US export sales stronger for longer. The payback for that rundown before now will likely reveal itself later in the year. Then Brazil will likely have more corn inventory than usual when the current US crop comes to market. In our view, that will mean extra carry pressure on coarse grain prices.
The market, of course, continues to look for what might emerge to upset that consensus. One possibility lurking is that China might step in and make hefty grain imports. The market is sensitised to this issue. The USDA, mistakenly, attributed a large export sale to China last week. Corn prices jumped sharply in response before the USDA corrected the destination to South Korea. The market is on alert for more China imports for a couple of reasons. One is that China’s coarse grain inventories have been sliding steadily. The other is that analysts believe China has strategic reasons to keep high inventories. We agree: the chances are greater. Some analysts view this possibility through a Trade War lens. This view envisages a trade deal that includes China importing a hefty amount of US corn. While trade-deal imports are certainly possible, we think that is not the only way China might import more grain. China could also achieve the same thing via imports from its BRICs buddies, Russia and Brazil. So, we think it best to view the China imports possibility as independent of the Trade War’s travails.
Markets
Corn’s position profile is anchored by modest open interest. Open interest increased last week but that was almost entirely due to bigger spread positions. In that context, the (almost unchanged) investor short remains large enough to be influential but nowhere near extreme. Both physicals and investors have the capacity for larger positions.
Momentum metrics suggest lower prices are the path of least resistance. Long-cycle momentum remains weak. Short-cycle momentum and counter-momentum both lost their bounce signals last week.
The View
We think the coarse grain market remains set up for prices to trade in a low range. The US corn crop is on track to be huge, and that will face unusual competition from Brazil’s corn, later in the year. The severity of that combination, however, remains uncertain. So, the market is not pricing the worst case, so we should be open to the possibility of new lows for corn prices. However, we think there are a couple of (related) defences against corn futures prices falling a lot further. One is that prices are already low. The other is the US Dollar’s descent. That descent, though, is only an offset for US$ coarse grain prices – prices in other (appreciating) currencies will then need to fall by more.
Oilseeds
Crop
Oilseed markets already have a number of crop issues to track. Now, as the weather horizon stretches well into August, we enter a critical period for oilseed crops. So, while these issues will not immediately translate into lower crop forecasts, that time is not far away.
SnD
The lack of movement in production forecasts leaves oilseed markets with the same overall neutral supply context. The action within that context continues to be dominated by policy consequences. Biofuel policy: what is and is not US RVO-eligible is siloing demand. Trade policy: rearranging of trade around China’s aversion to US soybeans. Argentina made this rearrangement a little easier last week when it cut export taxes.
Markets
The SnD influences continue to be reflected in spread-driven positions. Investors are, in some combination, very heavily short soybean meal and heavily long soy oil. We suspect a chunk of those outright positions are ‘tied’ in spread structures. The long oil-short meal trade is crowded, making those markets vulnerable to a sharp reversal if/when a catalyst appears.
Soybean futures continue to lack any momentum to drive prices for now.
The View: Oilseed prices are most likely to zig and zag sideways at relatively low levels. Canola’s premium is likely to persist because of high vegetable oil prices. So, like grains, oilseed price strategies ought to focus as much on currency and basis as they do on global price levels. Here too, a weakening US Dollar will support US$ prices but weigh on non-US$ prices.
