Volatile grains prices on trade conflict and weather

by: Casper Burgering

In this publication: Turbulence in grains markets has been high during the first half of 2019. The progress of and sentiment about the trade talks has a significant influence on the grains markets. Also, weather conditions have a particularly significant influence on grains prices. So far in 2019, conditions that are too wet or too dry have proven to be unfavourable for crops. This translates into volatile grains prices. In soybeans, shortages will result in soybean price increases in 2019/20. In the corn market, less favourable harvesting conditions lead to lower availability. And in wheat market, inventories will peak in 2019/20 alongside stronger demand growth.

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Trade conflict uncertainty creates volatile grains prices

So far this year, the difference between the highest and the lowest corn price is 24%. For the wheat price this is 22% while for soybeans the gap is 15%. This indicates that the grain markets have witnessed a turbulent first half of 2019. Most striking in the price trends of the three grain markets is the nearly simultaneous peaks and troughs in the prices. The common denominator here is the continuing trade conflict and the ongoing trade talks between the US and China. The progress of and sentiment about the trade talks has a significant influence on the grain markets. That is because the result of the trade talks has a direct effect on the future demand for grain. And that is why also sentiment about the progress of the talks has a major impact on prices. A negative sentiment usually leads to falling prices (less demand), and vice versa.

Weather conditions impact supply and above all grains prices

Higher price volatility is also caused by supply side issues. In addition to crop-threatening diseases (such as fungi) and insects (such as the invasion of the fall armyworm in Asia), weather conditions have a particularly significant influence on prices. So far in 2019, conditions that are too wet or too dry have proven to be unfavourable for crops. In the US, heavy rainfalls and flooding have had a negative effect on crop conditions and plantings were also delayed. Ultimately, this comes at the expense of crop quality. Meanwhile, farmers in Russia, Ukraine, the EU and also in Australia were faced with little rainfall and high temperatures, which damaged crop fields. Indeed, the US Department of Agriculture (USDA) had to adjust its production forecasts more than once this year because of the less favourable global weather conditions.

Sentiment of investors

Investors translate these circumstances into future supply and demand scenarios for grain markets. This causes a lot of price volatility in the short term. When sentiment is negative, investors expand their short positions and expect a fall in prices. When sentiment is more favourable, investors extend their long positions as they expect prices to rise. Currently, investors must digest the news about heat in the US, the good wheat harvest in Germany and soybean sales from Russia to China

Soybeans: shortages will result in soybean price increases in 2019/20

The trade conflict continues to influence soybean prices in the short term. Uncertainty about Chinese demand for soybeans going forward remains high. Meanwhile, the outbreak of African swine fever means pig farmers in China are purchasing fewer soybeans. This mainly affects soybean exports from Latin America to China. In the coming season (2019/20), global demand for soybeans will grow by 2% according to the International Grains Council (IGC). However, total production will decrease by almost 4%. As a result, inventories are expected to fall to 13% of total consumption, or 6-7 weeks of available consumption. In this scenario, soybean prices will recover during the 2019/20 season.

Corn: less favourable harvesting conditions lead to lower availability

According to the International Grains Council (IGC), both production and demand for corn will fall globally in 2019/20. On balance, the corn market will experience a shortage next season. That is mainly because production will decline faster than demand. As a result, stocks will decline further, falling from a level of 28% of total consumption to 24%, or approximately 12 weeks of consumption. Due to the extremely wet weather in the US over the past few months, the plantings have been delayed. This ultimately influences both the quality and the quantity of corn.

The US Department of Agriculture (USDA) indicated that in mid-July, 58% of the corn harvest was in good to excellent condition compared to 72% a year ago. This creates uncertainty about the US harvest and will determine price volatility over the coming months. It also increases the chance that the market will have a deficit next season. On balance, this will have an upward price effect and ABN AMRO expects a higher corn price in 2019/20.

Wheat: inventories will peak in 2019/20 alongside stronger demand growth

In the 2018/19 season, total wheat production will decrease by almost 4%, mainly due to challenging weather conditions globally. Consumption remains stable. As a result, stocks are declining, and this means that the price of wheat may recover towards the end of 2019. However, market dynamics will change in the 2019/20 season. The International Grains Council (IGC) expects production to grow by almost 5% in the new season. Wheat production in the US is expected to drop, mainly due to delays in harvesting due to wet conditions and less plantings. However, production will increase strongly in Australia, Ukraine and Russia where yields will rise.

Global demand will ultimately grow by just over 2% in 2019/20. Demand from the animal feed industry in particular will increase sharply. This means that compared to three seasons ago, growth in demand has once again exceeded the long-term average. On balance, inventories are rising and will reach a peak level. As a result, the available inventories compared to total consumption will increase to 36.3%. This will put some pressure on the wheat price. The strengthening growth in demand will provide a cushion. On balance, ABN AMRO expects a stable price trend for 2020.