Global tensions are great for grain prices, but not at all good for input costs for grain growers. The issues in Iran have seen oil prices rally, taking oilseeds and grains with them. Here we take a look at the short-term impacts.
The latest World Agricultural Supply and Demand Estimates (WASDE) Report, released two weeks ago, gave no indication that grain or oilseed prices were in line for a rise. The major commodities all saw supply revised marginally higher, in a rather benign report.
Since more than a few issues have emerged. The main one is Israel and the US bombing Iran. With Iran being a major oil producer, any disruption, real or perceived, was going to see prices rally. Rally they have, gaining over 20% since the start of the month. Oil prices did start this rally at a year low level, however, and the current price is back in the middle of the range since the start of the other dispute, the one in Ukraine.
Oilseed prices tend to follow crude oil, as their use in biofuel makes them somewhat of a substitute. The oilseed we are most interested in, canola, hit a new high in the local market last week, following international leads higher. Matif Rapeseed and ICE Canola Futures both rallied on higher oil prices, dragging local port canola values back above $800/t.
As outlined last week, local canola production is expected to be lower this year, and as such, canola could have further potential upside.
Chicago Soft Red Wheat (SRW) futures have had little impetus for upside, despite relatively tight global stocks. The rally shown on Figure 2 was in the order of 14%, and was helped by the heavy sold position speculators were holding in the market. We will likely need to see some fundamental news on weaker wheat stocks to keep wheat prices moving higher.
What does it mean?
The hedging window for canola is still open, but it would be a brave grower to lock in prices in the current turbulent environment. For wheat, selling on a rising market in June is rarely recommended, as problems arising now tend to persist. This one is a little different, being geopolitical, but again, we are seeing a return to volatility, which makes hedging difficult.
Wheat prices are still relatively low, so it might be consumers who think about averting some risk by using futures or swaps.
Key Points
- The conflict in Iran has seen oil rally, taking grain and oilseed prices higher.
- There has been little change in fundamental supply and demand conditions.
Click on figure to expand
Click on figure to expand
Data sources: Bloomberg, CME, ICE, Reuters, Mecardo
