I am struggling with what to write this week in a big way. Not because there’s nothing I am watching, quite the opposite. It almost feels like there is too much to watch right now.
From the outside macroeconomic factors and their influence on potential demand and subsequent price direction, to production weather in the US, export capacity in Brazil and a whole list of things happening in China, there is no shortage of market conversations we could be having. But again, the one thing that has attracted my attention the most because of its obvious influence on price, is the situation in the Black Sea.
You may not have seen it in this week’s price action, but the escalation of events there with an increase in the use of Ukrainian USVs, has been interesting to say the least.
According to my quick perusal of online resources, a USV is basically a remote-controlled speed boat capable of being loaded with explosives. Ukraine started using USVs last Fall, but for the most part, the Russian navy had been able to repel the seacraft. However, last week’s hit of a Russian landing ship was a major blow to the Russian navy, with Ukraine upping the ante Friday night by hitting another Russian owned vessel SIG.
At first glance, Ukraine hitting SIG is a huge deal, as it is listed as a merchant vessel. However, according to many military and shipping experts, SIG is a merchant vessel in name only, as it is typically used for hauling jet fuel to Syria. So, while it is still a big deal, had Ukraine struck a random merchant vessel, the situation would be far different.
In addition to the uptick in USV attacks, Ukraine also named 6 Russian ports part of their proclaimed ‘war risk area,’ putting shipping out of those ports at risk. Russia has also been cut off from the workaround created using JP Morgan to process their exports, making it more difficult to transact business by the day.
Because of these developments and changes we are starting to hear of ship owners looking to avoid the Black Sea, with costs for transportation out of Russian ports beginning to soar. This is a huge blow to the Russian war machine, and honestly was part of the reason I thought they would play nice regarding the corridor for the most part—Russia needs exports for cash, and they need the Black Sea to export.
While Ukraine has had the last year and a half to create new export routes, has spent millions on temporary and long-term storage and has access to subsidies and other types of aid allowing them to maintain industry while the invasion occurs, Russia does not. The Black Sea ports are vital to support the millions of barrels of oil, millions of metric tons of wheat and millions of dollars worth of other commodities shipped each year.
Until the last handful of days, Russia was in control of the Black Sea, now I would say that balance of power has shifted, even if just slightly.
What that means in the days and weeks ahead, I have no idea. But, with Russia needing to export nearly 1 million metric tons of wheat a week to meet expectations, time is of the essence to prevent shipping from being affected long-term. Not only are the impacts on shipping a concern, if buyers start to find Russia is an unreliable supplier, their market share becomes impacted as well.
Could this push Russia to return to the Black Sea agreement? The US did say they would be willing to look at anything if they were to return. Is the threat to their exports great enough to push them back? Or do they play hardball, double down on Ukrainian port infrastructure attacks, or worse yet, target a ship in the Black Sea themselves?
All of these remain a risk in the market, and all are reasons I struggle to sleep through the night again.
In other market moving news, I am watching Chinese bean demand closely. Brazil hasn’t necessarily run out of beans they are able to sell, but they have run out of export capacity as their record corn crop continues to be harvested. Brazilian ports struggle with shipping two commodities at once, with their seasonal transitions a very messy time it seems. The Port of Paranagua is now experiencing delays exceeding 40 days as it works to wrap up soybean loadings and start on corn.
China announced some significant policy measures set to help stabilize their economy earlier in the week, disappointing many onlookers who were expecting something announced that would help increase soybean demand. The Chinese government is going to focus much of their attention this go around on stabilizing the country’s property sector by lowering lending costs. They are also loosening rules that had limited consumption, both in the country’s property sector as well as its EV industry.
From the looks of it, China’s plan is to bolster domestic demand for domestically produced goods, this including soybeans. China has been actively working to build out their country’s soybean production for the last handful of years, hoping to reduce their demand on imports, by incentivizing domestic production. This sharp increase in domestic production has not necessarily been met with an uptick in demand as domestic beans have variable quality and are more expensive.
The limited demand for domestic beans, as well as what was a much slower start to the year crush-wise has left China with significant supplies of beans on hand, with some thoughts they may be tight on storage space as we head into harvest. There are rumors circulating that China may soon introduce new testing protocol for import unloads, as well as talk they could begin subsidizing domestic bean use in the country’s crush industry—both would impact future US bean export demand if seen.
This is not to take away from the recent uptick in new crop sales we have seen. With the troubles in Brazil when it comes to exports, and the likelihood the country’s corn export program takes center stage out into February, the US export window for new crop soybeans may be open a bit longer than currently anticipated.
US weather looks mostly benign and while we are a long way from putting this crop in the bin, production ideas will become clearer as crop tours get underway over the next handful of weeks. The USDA will update their supply and demand figures this week, with this month’s yield the first one put together by NASS, leaving us open to a potential surprise from last month’s figures.
What I’m watching this week will continue to evolve as the news cycle evolves with the Black Sea situation the key driver. Results of any tenders this week will be my focus as it will show us what is truly happening with cash price offers out of Russia after the recent spate of attacks. Talk of peace negotiations seem to be on the rise as well, so I remain hopeful the situation finds a remedy sooner rather than later.
As always, don’t hesitate to reach out with any questions. Have a great week!
On the date of publication, Angie Setzer did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
