Some weeks are just meant to humble you. This past week was one of them. The volatility we've seen is a timely reminder that markets don't have to make sense. As the old traders' saying goes, "The market can remain irrational longer than you can remain solvent."
Some weeks are just meant to humble you. This past week was one of them. The volatility we’ve seen is a timely reminder that markets don’t have to make sense. As the old traders’ saying goes, “The market can remain irrational longer than you can remain solvent.”
To me, the key driver for wheat prices remains the Black Sea. Despite reports suggesting both Russia and Ukraine may treat food and feed vessels as “off limits”, the conflict continues to escalate. This week alone, a Turkish-flagged vessel was struck by multiple drones near a Russian port, Russian missiles targeted bridges and rail infrastructure linking Ukraine’s Danube export corridor, more ships were hit near Odesa, taking the total to eight, and Russian missiles reportedly entered Polish airspace. Against that backdrop, wheat futures still managed to lose ground.
This can be partially explained by the boost in production across the MENA (Middle East/Northern Africa) nations. Combined, they have seen a 35mmt increase in production compared to last year. So, the additional supply – and therefore reduced demand – has been muting the potential supply shock.
Perhaps it’s my bullish bias, but I still struggle to reconcile current prices with the risks. SovEcon estimates that between 1 and 3mmt of grain exports per month are already being delayed by disruptions to Black Sea port operations. Should shipping be halted completely, that figure could climb to 6-8mmt per month. We’re only just entering the main Black Sea export window, so if attacks continue through the peak September and October shipping period, the market dynamic could change quickly.
Coupled to this, mother nature is having her own fun at the expense of the Europeans. River levels in the Rhine and Danube are getting low enough to restrict barge traffic, slowing the pace of exports to end users. It feels like a market that may simply require patience.
Over the weekend, we heard reports that a ‘deal’ with Iran was imminent. This saw the stock market rebound at the expense of commodities. The price of crude oil dropped $10/barrel to be under $80, which of course dragged the wider oilseed complex lower.
As we push into August, the market will pay increasing attention to the US row crops. Corn is finishing up pollination and getting into grain fill. StoneX recently published a national corn yield estimate of 184 bu/ac, below the market’s optimistic trend-line expectation of around 186 bu/ac. Soybeans are flowering with both species heavily reliant on moderate temperatures and plenty of moisture if they want to achieve trend line yields.
Next week
For now, the market appears to be pricing in a degree of stability in the Strait of Hormuz. Crude oil is hovering around US$80/barrel and, provided it stays there, energy should become less influential on agricultural markets. That said, the region remains a geopolitical flashpoint capable of changing sentiment overnight. The Black Sea still has some work in front of it if we are to see grain flow with any sort of surety.
The wheat complex has experienced a rather choppy few days, with systematic profit-taking shifting some of the heat out of the supply-squeeze-driven buoyancy we are
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Black Sea Escalates, Wheat Looks Away
Some weeks are just meant to humble you. This past week was one of them. The volatility we’ve seen is a timely reminder that markets don’t have to make sense. As the old traders’ saying goes, “The market can remain irrational longer than you can remain solvent.”
To me, the key driver for wheat prices remains the Black Sea. Despite reports suggesting both Russia and Ukraine may treat food and feed vessels as “off limits”, the conflict continues to escalate. This week alone, a Turkish-flagged vessel was struck by multiple drones near a Russian port, Russian missiles targeted bridges and rail infrastructure linking Ukraine’s Danube export corridor, more ships were hit near Odesa, taking the total to eight, and Russian missiles reportedly entered Polish airspace. Against that backdrop, wheat futures still managed to lose ground.
This can be partially explained by the boost in production across the MENA (Middle East/Northern Africa) nations. Combined, they have seen a 35mmt increase in production compared to last year. So, the additional supply – and therefore reduced demand – has been muting the potential supply shock.
Perhaps it’s my bullish bias, but I still struggle to reconcile current prices with the risks. SovEcon estimates that between 1 and 3mmt of grain exports per month are already being delayed by disruptions to Black Sea port operations. Should shipping be halted completely, that figure could climb to 6-8mmt per month. We’re only just entering the main Black Sea export window, so if attacks continue through the peak September and October shipping period, the market dynamic could change quickly.
Coupled to this, mother nature is having her own fun at the expense of the Europeans. River levels in the Rhine and Danube are getting low enough to restrict barge traffic, slowing the pace of exports to end users. It feels like a market that may simply require patience.
Over the weekend, we heard reports that a ‘deal’ with Iran was imminent. This saw the stock market rebound at the expense of commodities. The price of crude oil dropped $10/barrel to be under $80, which of course dragged the wider oilseed complex lower.
As we push into August, the market will pay increasing attention to the US row crops. Corn is finishing up pollination and getting into grain fill. StoneX recently published a national corn yield estimate of 184 bu/ac, below the market’s optimistic trend-line expectation of around 186 bu/ac. Soybeans are flowering with both species heavily reliant on moderate temperatures and plenty of moisture if they want to achieve trend line yields.
Next week
For now, the market appears to be pricing in a degree of stability in the Strait of Hormuz. Crude oil is hovering around US$80/barrel and, provided it stays there, energy should become less influential on agricultural markets. That said, the region remains a geopolitical flashpoint capable of changing sentiment overnight. The Black Sea still has some work in front of it if we are to see grain flow with any sort of surety.
Have any questions or comments?
Click on graph to expand
Click on graph to expand
Click on graph to expand
Data sources: Next Level Grain Marketing, Reuters, SovEcon, StoneX, Bloomberg, Mecardo
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Independent analysis and outlook for wool, livestock and grain markets delivered to you as it’s published
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Join the Mecardo team for the Commodity Conversations podcast, where we provide short weekly market recaps and longer conversations with guests to discuss the drivers and trends in livestock, grain and fibre markets.
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Our team of market analysts are recognised as leaders in Australian Ag market analysis, providing invaluable insights to help you navigate the ever-changing commodity landscape.
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We don’t just bring you the most up to date market insights. Find out more about Mecardo’s services including risk management advisory, modelling, benchmarking, research & consultancy.